What is Superannuation and how does Superannuation work?

Sub Editor · 28 January 2021
Whether a ‘comfortable retirement’ means walks on the beach, golfing, more time with your family, good health or being able to eat out more often, it’s likely financial security will be necessary in achieving your later-life goals. Understanding how superannuation works could help you feel better prepared.

Superannuation, or super, is a crucial part of Australia’s retirement landscape.  Internationally, Australia has the 4th largest pension market in the world, according to the Thinking Ahead Institute’s Global Pension Assets Study, and had $2.9 trillion invested in super assets as of September 2020.In this article, we discuss:

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

How does superannuation work?

Your employer must pay at least 9.5% of your ordinary time earnings into a super fund on top of your annual salary if you are an employee in Australia and meet the minimum requirements to receive the Superannuation Guarantee (SG). 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. If you meet the eligibility requirements then you must be paid super, whether you work casually, part-time, full-time or potentially even as a contractor, and even if you are a temporary resident. 

The money held in a superannuation account is invested in a range of assets by the super fund that manages it. Most funds give members the option of choosing how their savings are invested.

You can compare super funds based on factors such as competitive fees, strong past performance, a good combination of investment and insurance options and other services, such as easy online roll-over of funds. Choosing a high-performing super fund that suits your personal needs may help you to grow your super over time, although bear in mind that past performance is not a reliable indicator of future performance. 

Do you need to have a super fund?

If you’re an employee in Australia and you meet the minimum requirements set out to qualify for the Superannuation Guarantee (SG), you need to have a super fund. Most people can choose the super fund they want their super contributions paid into by filling out the ATO’s Superannuation standard choice form when they start a new job. This form is generally provided by your employer.

When you join a new company, you will be asked if you want to join that company’s default super fund. These include MySuper funds, which are basic super products with low fees that your employer will pay your super into if you don’t choose a fund at all. At the time of writing, employees who want to keep their old super fund when starting a new job generally fill out a form to advise their new employer of this decision.

From 1 July, 2021, changes being introduced as part of the Australian Government’s Your Future, Your Super package mean that workers will automatically keep their super fund even if they change roles. Super will, in effect, be ‘stapled’ to you personally, unless you actively choose a new fund upon starting a new job.

If you are a sole trader, you generally do not have to pay yourself super. However, according to Moneysmart, there may be advantages if you decide to choose a super fund and make regular or lump sum payments, such as being able to save on tax, and benefitting from returns that are usually more favourable in the long run than interest rates on savings accounts.

When can you access your super?

Accessing your super is normally limited to people who have reached a certain age, which is known as their preservation age. The preservation age is a restriction preventing people from accessing their superannuation until their retirement, unless they meet a condition of release such as reaching age 65 even without retiring. Depending on when you were born, the preservation age in Australia is as follows:

Preservation age is not the same as pension age. The age pension age is currently increasing from 65 to 67 years. It will increase by six months every two years until the Age Pension age is 67 in 2023.

There are special circumstances that may allow you to access your super early, such as severe financial hardship and compassionate grounds. The Australian Government’s COVID-19 early release of super scheme closed on 31 December, 2020. 

What are concessional and non-concessional super contributions?

You can consider concessional and non-concessional super contributions to grow your super over time. 

Concessional super contributions

Concessional contributions are funds that go into your super account from your before-tax income. Concessional contributions are taxed at 15% and there is a cap that applies each financial year (currently $25,000 as a maximum amount for the 2020–21 financial year). The ATO warns that if your concessional contributions exceed your cap, the excess money will be taxed at your marginal tax rate, plus an “excess concessional contributions charge”. 

According to the ATO, examples of concessional contributions include:

  • employer contributions, including:
    • compulsory employer contributions (predominantly SG 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

Non-concessional super contributions

Non-concessional contributions are made from your after-tax income, and are not taxed in your super fund. According to the ATO, examples of non-concessional contributions include:

  • contributions from your after-tax income (made by you or your employer)
  • spousal contributions (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

Saving money towards retirement

Spousal contributions to super are generally considered to be a non-concessional contribution.

The annual cap for non-concessional contributions was lowered to $100,000 from 1 July 2017, and is being indexed in line with the concessional contribution cap, meaning both caps could go up over time. If you go over your non-concessional contributions cap, the ATO warns you will pay more tax. For the 2020–21 financial year, for example, a tax rate of 47% applies to any money  exceeding the cap on non-concessional super contributions.

How much super do you need to retire comfortably?

Canstar data suggests many Australians could be likely to suffer from a shortfall in superannuation savings when it comes time to retire – if they want to retire comfortably. The research shows that to be on track for this lifestyle, 30-year old men and women would need to have around $61,000 in their super account today, but on average, they are currently between $35,000 and $39,000 short of that balance. Women currently in their 60s face the biggest super gap of more than $275,000, based on this data.

The Association of Superannuation Funds (ASFA) has a Retirement Standard that estimates how much you’re likely to need in retirement, and Canstar’s Superannuation and Retirement Planner Calculator is also designed to help you plan for the future.

If you’re comparing Superannuation funds, the comparison table below displays some of the products currently available on Canstar’s database for Australians aged 30-39 with a balance of up to $55,000, sorted by Star Rating (highest to lowest), followed by company name (alphabetical). Use Canstar’s superannuation comparison selector to view a wider range of super funds.

Fee, performance and asset allocation information shown in the table above have been determined according to the investment profile in the Canstar Superannuation Star Ratings methodology that matches the age group.

Cover image source: Watchara Ritjan/Shutterstock.com

Additional reporting by Ellie McLachlan and William Jolly. This article was reviewed by our Sub Editor Tom Letts before it was updated, as part of our fact-checking process.

About the author:


Jacqueline Belesky is a Sub Editor at Canstar. She brings over 15 years of experience in corporate communications, media and publishing and holds a Bachelor of Journalism (Distinction) from Queensland University of Technology and postgraduate qualifications in Writing, Editing and Publishing from the University of Queensland. Jacqui was previously a Global Content and Media Manager for ABB in the UK and in Oslo, Norway, and has worked in Australia as a journalist for News Corp and editor for the Queensland Government, John Wiley & Sons and the University of Queensland. Jacqui’s articles have been published in The Courier-Mail, The Gold Coast Bulletin and on www.news.com.au. She also brings experience managing the editorial production of annual reports, financial statements, research papers and supplements on topics such as business sustainability and the global financial crisis. You can follow Jacqui on LinkedIn and Twitter.

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