Introduction to superannuation
Along with your health and loved ones, one of the most important things to consider in the golden years of your retirement is your superannuation.
These days, most people living in Australia can expect to enjoy 20 or more years of retirement. When that time comes, your superannuation is an invaluable nest egg to have: a regular income that can supplement or even substitute the age pension.
By taking the time to understand how Australian superannuation works, you can help set yourself up for future financial security.
How does superannuation work?
Superannuation (‘super’) is a portion of your before-tax wage set aside by your employer for you to live on when you reach retirement. The money is placed in a fund where it accrues throughout your working life. It is also invested in various assets, such as shares, property, cash or commercial ventures.
When you start a new job, your employer will request the name of your current super fund, usually through an Australian Taxation Office (ATO) standard choice form. If you don’t choose a fund, they will select one for you.
What are the different types of superannuation?
Superannuation companies in Australia operate four different types of professionally-managed funds:
- Retail funds: For-profit entities that are usually run by banks
- Industry funds: Not-for-profit entities that were originally designed for workers from a particular industry, but are now open to all Australians.
- Public sector funds: Generally reserved for federal or state government employees.
- Corporate funds: Arranged by companies for their staff.
You can also opt for a fifth type of fund, known as a Self-Managed Super Fund (SMSF), which allows you to directly control how your superannuation is invested rather than outsourcing the job to a superannuation company.
What is the best superannuation fund?
Unfortunately, it’s impossible to say what the best superannuation fund is, for four reasons:
- It depends on your specific financial situation and life circumstances, because the fund that will be best for one person might not be best for another.
- People’s financial situations and life circumstances often change, so the fund that’s best for you today might not be best for you tomorrow.
- Governments sometimes make changes to superannuation regulation, which can affect how different funds operate.
- Super funds themselves make changes to their fees and policies, which means that a fund’s ‘ranking’ is never set in stone.
How do you compare superannuation funds?
Comparing superannuation funds can be tricky, because there are more than 200 different superannuation funds in Australia.
It’s important to do your research or speak to a financial planner when deciding which fund works for you, because the market is large and funds often change their policies. Also,
Some areas to consider are:
- Investment performance: Funds have different investment options, from high-risk options with higher rates of return, to more conservative approaches in cash or fixed-interest investments. Take the time to compare the five-year investment performance of different funds on RateCity, as this could impact how much super you have at retirement (remember that past performance is not a reliable indicator of future performance).
- Fees: Check what fees a super fund charges for services like administration, switching from one investment option to another, financial advice or exiting.
- Insurance cover: Many funds offer life insurance, disability cover and income protection cover. The premiums on these insurances are usually deducted from your super account, making them more tax-effective. Before choosing a super fund, find out what insurances they offer, whether they come with limitations or health checks, and the premiums they charge.
When can I access my superannuation in Australia?
You can access your superannuation when you reach your ‘preservation age’, which is between the ages of 55 and 60 depending on when you were born.
Preservation age based on date of birth
| 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 |
Source: ATO
You can access your super early by applying to the Department of Human Services or your super fund in special circumstances, such as severe financial hardship, a terminal medical diagnosis, or if you’re a temporary resident leaving Australia.
Be wary of operators who claim they can offer you early access to your super. These operations are illegal and can incur heavy penalties.
How much superannuation do I need?
How much super you need depends on when you plan to retire, your housing situation and the standard of living you prefer.
As a rough guide, consider the Association of Superannuation Funds of Australia’s retirement standard benchmarks:
Budgets for various households and living standards (March quarter 2018, national)
| 65 year old singles | 65 year old couples | 85 year old singles | 85 year old couples | |
|---|---|---|---|---|
| Modest lifestyle | $27,368 | $39,353 | $25,841 | $36,897 |
| Comfortable lifestyle | $42,764 | $60,264 | $40,636 | $56,295 |
Source: Association of Superannuation Funds of Australia - assumes that the retirees own their own home outright and are relatively healthy
Once you’ve estimated how much super you’d like to retire on, you can use the government’s super calculator to estimate what your super balance may look like when you retire, given your current rate of contributions.
What is the superannuation guarantee?
Most countries have some form of superannuation in place. The bedrock of Australia’s superannuation system is the superannuation guarantee, through which employers must contribute a percentage of their employee’s ordinary time earnings into their super fund.
You are eligible for the super guarantee if you are:
- 18 years old or over
- Earned more than $450 before tax in a month in full-time, part-time or casual work
- A temporary resident
- A contractor paid primarily for labour
The superannuation guarantee is currently 9.5 per cent of a worker’s wage, and is legislated to grow over the coming years:
Super guarantee percentage
| Period | General super guarantee (%) |
|---|---|
| 1 July 2002 - 30 June 2013 | 9.00 |
| 1 July 2013 - 30 June 2014 | 9.25 |
| 1 July 2014 - 30 June 2015 | 9.50 |
| 1 July 2015 - 30 June 2016 | 9.50 |
| 1 July 2016 - 30 June 2017 | 9.50 |
| 1 July 2017 - 30 June 2018 | 9.50 |
| 1 July 2018 - 30 June 2019 | 9.50 |
| 1 July 2019 - 30 June 2020 | 9.50 |
| 1 July 2020 - 30 June 2021 | 9.50 |
| 1 July 2021 - 30 June 2022 | 10.00 |
| 1 July 2022 - 30 June 2023 | 10.50 |
| 1 July 2023 - 30 June 2024 | 11.00 |
| 1 July 2024 - 30 June 2025 | 11.50 |
| 1 July 2025 - 30 June 2026 | 12.00 |
| 1 July 2026 - 30 June 2027 | 12.00 |
| 1 July 2027 - 30 June 2028 and onwards | 12.00 |
Source: ATO
I’m self-employed. Do I pay myself super?
If you’re self-employed, there is no system to ensure you contribute regularly to your super account. You can make contributions by putting aside a lump sum when cash flow allows, or if you pay yourself a wage, provide your own superannuation guarantee by putting the relevant amount of your before-tax income into super.
How do I find lost super?
Across Australia, there was around $18 billion worth of lost super at the end of June 2017. If you’ve moved jobs and haven’t given your super details to your employer, you may have lost super spread across multiple funds, or held by the ATO on your behalf as unclaimed super.
Consolidating your super into one fund not only cuts down on account fees; it also makes it easier to manage your savings. The good news is that finding lost super is relatively easy to do:
- Create an online myGov account if you don’t have one already
- Link it to the ATO’s online services to see details of all your super accounts, including any lost super
- The ATO will then allow you to transfer the money into your preferred fund
How can I boost my superannuation?
Australian superannuation is a tax-effective system designed to help people save for retirement. Your employer’s contribution into your super fund, for example, is taxed at only 15 per cent – less than half the average marginal tax rate for most workers.
This means putting extra contributions towards your super can be a good way to take advantage of tax incentives offered by the government – not to mention save for your future.
You can contribute extra to your super in two ways:
- Make contributions from your before-tax income by ‘salary sacrificing’. You can arrange for your employer to direct a portion of your before-tax salary to superannuation and attract a lower 15 per cent tax rate rather than the higher marginal tax rate. Take care though: the amount of before-tax contributions you can make is currently capped at $25,000 a year. Once you reach that amount (known as the ‘concessional contributions cap’), you will be hit with a penalty tax.
- Make extra super contributions from your after-tax income. Called a ‘non-concessional contribution’, this is money put into your super from your take-home pay, or from money made elsewhere. Although you don’t get a tax concession on this contribution like with salary sacrificing, any investment income generated from that amount is taxed at a concessional rate of 15 per cent. There is currently a non-concessional contributions cap of $100,000 per financial year.
What government super assistance is available?
If you are on a lower income, you may be eligible for the Low Income Superannuation Tax Offset (LISTO): a co-contribution scheme established by the government to help workers on low incomes save more superannuation in Australia.
LISTO refunds up to $500 of the tax paid on concessional (before-tax) super contributions for workers with a yearly income of up to $37,000. The benefit is paid directly to your super fund.
Can my partner help boost my superannuation?
Under the Australian superannuation system, you can contribute to your spouse or de facto partner’s super by ‘contribution splitting’: having some of your super placed into your partner’s account.
Contribution splitting can only be done at the end of the financial year. It’s a handy option if, for example, your partner takes time off work to care for children and needs to top up their super.
RateCity allows you to compare Australia’s superannuation funds according to performance, fees charged and features. This can help you ensure your retirement is in the best possible hands.
