What is superannuation in Australia?

Superannuation is money that is put aside during your working life, which can be used as a source of income when you retire. We explain the dollars and cents of super for your financial future.

What is superannuation?

Superannuation is the portion of your earnings and savings that is placed in a fund and typically held there for you to use after you retire. The objective of superannuation is to provide income in retirement that substitutes or supplements the Australian Age Pension.

There are many superannuation providers in Australia and there can be big differences in how they invest members’ money and how those investments perform. You may be interested in reading about the top performing super funds, based on investment returns from providers on Canstar’s database.

Fees charged can also vary significantly between funds, so keeping an eye on the fees you’re being charged is also important. Most funds offer members insurance through their super, with regular premiums deducted from the member’s account balance.

The Association of Superannuation Funds of Australia (ASFA) has a Retirement Standard that estimates how much you’ll need in retirement, depending on whether you are single or in a couple and want to live modestly or comfortably.

Current estimates suggest you’ll need about two-thirds (67%) of your pre-retirement income to maintain an equivalent standard in retirement. For a couple seeking a comfortable retirement, this equates to $64,771 annually in living costs, according to ASFA’s figures for the December quarter, 2021.

→ Read more: Here’s how much super Aussies need in their accounts right now to retire comfortably

If you are considering which super fund to pick for your retirement savings, Canstar releases annual Superannuation Star Rating and Awards that consider investment performance, fees, insurance premiums and product features across super products and providers on our database.

How does super work in Australia?

If you are an employee in Australia and meet the minimum requirements in the Superannuation Guarantee, your employer must currently pay at least 10% of your ordinary time earnings into a super fund.

This payment is on top of your annual salary and is known as the Super Guarantee. You must be paid super whether you work casually, part-time, full-time, as a contractor, and even if you are a temporary resident.

The Super Guarantee is scheduled to increase incrementally to 12% by 1 July 2025, with the next increase scheduled for 1 July 2022 bringing the rate up 10.5%.

When you start a new job or begin working for the first time, most people can simply let their employer know what their preferred super fund is and which account their employer should make super payments to.

If you do not select a fund for yourself and you have been paid super previously, your employer will need to pay super into what’s called your ‘stapled fund’. If you have never been paid super before and don’t nominate a preferred fund, your employer will create an account for you with its default super fund and pay your super contributions into that.

How is super invested?

Money held in a superannuation fund is invested in a range of assets by your fund. You may decide to invest your super differently at different life stages, or based on other factors that are relevant to you personally.

Most funds give members the option of choosing their preferred investment mix, based on risk estimates. Australia’s largest super fund, AustralianSuper, for example, offers different investment choices for members based on how ‘hands on’ they want to be in managing their investments, and suggests considering how much risk you are comfortable with in allocating investment options.

It outlines different types of risk, including adequacy (your amount of super vs your needs for retirement), volatility (market risk), inflation, market timing, currency (movements in exchange rates), interest rates, liquidity, agency (the risk of third parties mismanaging investments), credit (the risk of an issuer of a security, such as a bond, not paying back borrowed money when it’s due) and policy (the risk of regulatory and rule changes impacting your investment), which members can consider in reviewing their overall investment mix.

Based on ASFA data, super assets in Australia totalled $3.4 trillion as of September 2021.

About 28% of assets ($624 billion) were invested in international shares, about 23% in Australian listed shares, and smaller percentages allocated to assets such as cash, Australian fixed interest, international fixed interest, listed and unlisted property, infrastructure, hedge funds, unlisted equity and other assets. Many Australians are invested in the balanced default option for a super fund, but whether or not this is right for you will depend on your personal needs and requirements.

Related: Is now the time to change your superannuation investments?

Types of super funds

With super typically representing the bulk of retirement savings, choosing a superannuation fund should ideally be a well-researched decision.

Accumulation funds and defined benefit funds

Under Australia’s superannuation system, there are two types of funds: (1) accumulation funds and (2) defined benefit funds.

1. In an accumulation fund, the value of your super typically can grow over time as you and your employer make contributions and depending on how your super fund invests those savings. How much money you have to supplement your income after retirement depends on the balance of your super account.  This type of fund is much more common.
2. A defined benefit fund, in contrast, typically has a set retirement benefit paid to members, which is determined by a formula rather than an investment return, according to Moneysmart. Usually defined benefit funds are public sector or corporate funds, and many are not open to accepting new members.

Super fund types and options

ASFA lists corporate funds, industry funds, public sector funds and retail funds as some types of super funds. In addition, there are MySuper funds and self-managed super funds (SMSFs). Here are some of the key differences:

1. Corporate/employer super funds. Employer super funds can offer a wide range of investment options, be low- to mid-cost funds if the business is large, and often return profits to their members. They can also be retail funds (see below).
2. Industry funds. Industry super funds were originally developed by trade unions and industry bodies. Industry super funds differ from retail funds in that they re-distribute profits from investments directly to members. Many have retained a non-profit, member-first ownership model and are now open to the public. There are differences between industry and retail super funds.
3. Public sector funds. Public sector super funds are generally for people working in the public sector, such as government roles. Public sector funds commonly have limited investment options, lower fees or MySuper options and a member-first profit model. Many long-term members have defined benefits, while newer members are usually in an accumulation fund.
4. Retail funds. Retail funds are usually run by financial institutions or investment companies. Generally, anyone can join a retail fund and they often have a large number of investment options. You can either apply to join a retail fund directly, or they may be recommended by your financial adviser who may be paid for their advice by fees. Costs can vary significantly between retail funds, so it could be worth carefully comparing your options.
5. MySuper funds. MySuper is a scheme from the Australian Government where employees are offered effective, low-fee super funds as their default option. Fees on MySuper funds are often restricted to covering the cost of producing their service only, which includes administration fees and investment fees.
6. Self-Managed Super Funds (SMSFs). A self-managed super fund is a superannuation fund that you can manage yourself, which is different to a regular super fund which is controlled by a fund manager. You can set up your own private super fund and manage it yourself, but only under strict rules regulated by the ATO. An SMSF can have between one to four members, and each member acts as a trustee.

Related: How to choose a super fund