How Does Superannuation Work?

Not sure about aspects of your superannuation? We cover the basic concepts you need to know about super.

What is superannuation?

Superannuation, according to the Australian Taxation Office (ATO), is money put aside by your employer over the course of your working life that you live on once you retire. Superannuation is extremely important, as you need a solid amount of money to live off when you’re no longer working.

How does superannuation work in Australia?

Superannuation is paid by your employer into a super account of your choosing. As of July 2014, your employer is required to pay a minimum of 9.5% of your ordinary time earnings into this super fund on top of your yearly salary.

Ordinary time earnings: what an employee would earn during ordinary working hours, and does not include overtime.

Once this money is placed into your super fund, it is then invested by the fund manager. You’ll find that most super funds offer a variety of different investment options, and because of this, the returns you get will vary from fund to fund. According to Canstar’s Superannuation Star Ratings, there are some super funds that have generated one-year returns of more than 10%.

While there are some more complicated aspects of superannuation, that is the essence of it; you put a minimum of 9.5% of your salary into a super fund and leave it there, untouched, until the day you retire. Special circumstances permitting, you can only withdraw your super once you hit 65.

For an example of superannuation in action, see the case study below:

Mark is 30 years old and has $20,000 in superannuation. He earns $65,000 per annum (indexed at 2.5% each year) and receives superannuation contributions of 12%.      Mark is 30 years old and has $20,000 in super

  • His fund earns an average of 7% per annum and
  • Pays fees of 1% per annum.
  • At age 65 he could expect to have accumulated approximately $996,045 in his retirement fund.

Mark decides, however, to research his options.

  • He chooses a fund with an average return of 8% per annum and
  • Fees of 1% per annum.
  • He could now expect to have accumulated $1,155,730 by age 65.

If he chose a fund returning 8% per annum but also only charging 0.5% in annual fees, he could expect to boost his account balance at age 65 by another $147,038, to a total retirement nest egg value of $1,302,770.

Do you need to have a super fund?

If you’re an employee in Australia and you meet the minimum requirements, then you are required to be paid super by law. You must be paid super, regardless of whether you are working as casually, part-time, full-time, as a contractor, and even if you are a temporary resident in Australia.

When you join a new company you will be asked if you want to join that company’s default super fund. They are lawfully required to do this as well, but you don’t have to accept it. You can choose your own super fund, as Mark did above, by comparing them on fees, performance, investment options and more.

When can you access your super?

Accessing your super is limited to people above a certain age, which is known as the preservation age. The preservation age is a restriction preventing people from accessing their superannuation until their retirement unless they meet a condition of release.

Depending on when you were born, the preservation age in Australia is as follows:

Date of birth Preservation age
Before 1 July 1960 55
1 July 1960 – 30 June 1961 56
1 July 1961 – 30 June 1962 57
1 July 1962 – 30 June 1963 58
1 July 1963 – 30 June 1964 59
From 1 July 1964 60

There are special circumstances that allow you to access your super early, however:

  • A terminal medical condition
  • Severe financial hardship
  • And incapacity

You can read more about the rules involved in accessing your super here.

5 key facts about superannuation

So if being involved in and choosing a super fund hasn’t yet sparked your interest, then here are five very important things you should know:

Superannuation is part of your salary

When the ACTU (Australian Council of Trade Unions) first negotiated superannuation for the majority of workers, the initial SG rate of 3% was negotiated in lieu of higher cash-in-hand salaries. That initial 3% has now risen to 9.5% (and is scheduled to gradually rise to 12%).

It’s your money – money that you work hard for! That’s a great reason to take an interest in what happens to it. Even small changes can make a difference decades into the future when you access your super.

Superannuation is simply a tax structure

The word “superannuation” is often used in a rather generic way when reported in the media. It is important to remember though that superannuation is simply a tax structure and that it is the underlying investments that you choose to hold within that structure – the combination of shares, property, cash and others – that will determine the performance of your investment.

Superannuation is tax-effective

As tax structures go within the Australian Taxation Office (ATO), superannuation is very tax effective! For example, the money your employer pays into your superannuation fund is taxed at only 15%, compared to the  marginal tax rate for most workers which can be as high as 45% (plus Medicare levy)!

As well, the earnings within your superannuation fund are taxed at only 15%, which again is less than half the marginal tax rate paid by the majority of workers. This makes superannuation a very tax-effective way to save for your retirement!

Superannuation can include group insurance cover

Despite most workers believing that “it won’t happen to them”, it sometimes does. The Risk Store recorded total personal insurance payouts from retail companies alone at over $4.4 billion in 2012. That figure doesn’t include amounts paid from superannuation fund group insurance policies. Many superannuation funds offer the option of Life, Total and Permanent Disability and Income Protection insurance and the premiums can be very cost-effective – with the added benefit of being deducted from your super fund balance rather than your hip pocket. However, there are some disadvantages to having life insurance in your super; you can read up on more here.

Small choices now can make a large difference in the future

While awareness about superannuation issues is growing, a significant number of workers nevertheless make no active choice as to where their retirement nest egg is invested. Yet small differences in both fees and investment return now can materially impact on your eventual wealth. If you hold multiple super funds from previous jobs you’ve had, you’re paying excessive fees when you don’t need to! Super funds can be consolidated into a single super account, and more often than not super funds are willing to help you through this process. You can find out more about consolidating super here.

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 you selected.

To view the past performance of all super funds, rated by Canstar, use our comparison tool:

Learn more about Super

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