How does superannuation work in Australia?

Got some questions about superannuation? Here are answers to help you understand how super works.

What is superannuation?

Superannuation, or super, is an investment especially designed for retirement. Your employer puts money aside that you can access when you retire. You can also make your own contributions. The idea is that when you retire you’ll have a sum of money to make up for the fact that you are no longer being paid a salary.

How does superannuation work?

If you’re an employee in Australia you are typically entitled to super contributions from your employer. This is known as the Super Guarantee. Your employer must pay at least 10.5% of your ordinary time earnings into a super fund. Your ordinary time earnings, according to the Australian Taxation Office (ATO), are what you generally earn for ordinary hours of work, including your base salary or wages along with certain bonuses, allowances, and some paid leave. Payments for overtime hours are generally not included in ordinary time earnings.

The SG rate will gradually increase over the next few years. It will go up to 11% on 1 July 2023, 11.50% on 1 July 2024 and 12% on 1 July 2025.

You are entitled to the SG regardless of whether you work casual, part-time or full-time hours, and if you are a temporary resident. If you are under 18, though, you have to work at least 30 hours in a week to be eligible for the SG contribution.

You can also make your own contributions to your super fund (more on this later).

Most Aussies can choose the super fund they want their contributions to be paid into. There are a number of factors to consider when choosing a super fund including the fees charged, how it has performed over the long term, the investment options available, insurance and what other services the fund offers.

The money held in your superannuation account is invested in a range of assets by the super fund that manages it. Most funds will let you have a say in how you want your savings invested.  You can generally choose from a range of investment options.

Compare Super Funds

Do you need to have a super fund?

If you are entitled to super from your employer, you do need to have a super fund. When you begin working for the first time or start a new job, you can let your employer know what super fund you’d like your contributions paid into. Your employer will give you a ‘Superannuation standard choice form’ which you can fill in if you want to nominate a super fund.

If you don’t choose a fund, your employer has to ask the ATO if you have a ‘stapled fund’. This is essentially an existing super account that is linked, or ‘stapled’, to you so that it follows you when you change jobs. The ATO will notify you if your employer makes a stapled super fund request and the fund details it has provided.

If you have not nominated a super fund and you don’t have a stapled fund, your employer can pay your super contributions into their default fund.

If you’re self-employed, you don’t have to pay yourself super but you can if you want to. You may choose to make regular contributions or pay lump sums when you can. You may be able to claim a tax deduction for up to $27,500 in annual super contributions. And, as Moneysmart points out, super contributions are taxed at 15%, so you may save tax depending on your situation.

What are concessional and non-concessional super contributions?

There are two different types of super contributions – concessional and non-concessional super  –  and you can use either (or both) of these to grow your super over time.

Concessional super contributions

Concessional contributions are also known as before-tax contributions because they are made from your before-tax income. Concessional contributions are taxed at 15%.

According to the ATO, examples of concessional contributions include:

• employer contributions, such as:
  • compulsory employer contributions
  • additional concessional contributions by your employer
  • salary sacrifice payments
  • other amounts paid by your employer from your before-tax income (e.g. administration fees and insurance premiums)
• contributions allowed as an income tax deduction
• notional taxed contributions if you are a member of a defined benefit fund
• unfunded defined benefit contributions
• some amounts allocated from a fund reserve
• for people over 18, certain family and friend contributions.

There is a cap on how much you can add to your super each financial year. If you exceed these caps, you may need to pay extra tax. The limit on concessional contributions is currently $27,500. Keep in mind this figure includes your employer’s compulsory contributions. The ATO explains that your cap may be higher if you did not use the full amount of your cap in earlier years. This is called the carry-forward of unused concessional contributions.

Non-concessional super contributions

Non-concessional contributions are those made from your after-tax income. As you have already paid tax on this money no additional tax is applied.

According to the ATO, examples of non-concessional contributions include:

• contributions you make, or your employer makes on your behalf, from your after-tax income
• contributions your spouse makes to your super fund (unless your spouse is also your employer)
• personal contributions not claimed as an income tax deduction
• excess concessional (before-tax) contributions that you’ve decided not to release from your super fund
• contributions over your capital gains tax (CGT) cap amount
• retirement benefits withdrawn from super that you then ‘re-contribute’ back into it
• most transfers from foreign super funds (e.g. New Zealand KiwiSaver contributions), but excluding amounts in your fund’s assessable income.

Caps apply to non-concessional contributions you can make into your super each year. The limit is currently $110,000. It may be higher if you’re eligible to use bring-forward arrangements.

When can you access your super?

According to the ATO, you can access your super when you:

• reach your preservation age and retire
• reach your preservation age and choose to begin a transition to retirement income stream while you are still working
• are 65 years old (even if you have not retired).

Your preservation age (which is not the same as age pension age) depends on when you were born (see table). For anyone born from 1 July 1964 onwards, it is 60.

Preservation age based on date of birth

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Source: Australian Taxation Office

You may be able to access your super early in certain circumstances. These include compassionate grounds or if you’re experiencing severe financial hardship but you’ll have to meet strict conditions.

Read more: Early access to super: Can I withdraw my super early?

How much super do you need to retire comfortably?

The answer to this question will be different for everyone. It depends on when you want to retire, the type of lifestyle you want to live in retirement and, of course, how long you’ll live. You can work out the magic number for you by considering all these factors.

One figure that is often used as a benchmark is the Retirement Standard published by the Association of Superannuation Funds of Australia (ASFA). It estimates that for a “comfortable” retirement a couple will need $640,000 in savings and a single person will need $545,000.

Super Consumers Australia has also produced Retirement Savings Targets to give people an idea of how much they need to save for retirement. According to its calculations, a couple with a medium level of spending will need $402,000 and a single person will need $301,000. These figures assume you will be eligible for the age pension.

It’s important to keep in mind that the estimates made by both ASFA and Super Consumers Australia assume you will own your home outright when you retire. If you will still be paying rent or a mortgage you will probably need more.

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