Introduction to superannuation
Along with your health and loved ones, one of the most important things 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 do you compare superannuation funds?
Comparing superannuation funds can be tricky, because there are more than 200 different superannuation funds in Australia.
There are a number of different measures you can use to compare superannuation funds, such as fees, performance, investment options and insurance options.
It’s important to do your research, because the market is large and funds often change their policies. Also, governments sometimes make changes to superannuation regulation, which can affect how different funds operate.
What are the different types of superannuation?
Superannuation companies in Australia operate four different types of professionally managed funds – retail funds, industry funds, public sector funds and corporate funds.
Retail funds are for-profit entities that are usually run by banks, while industry funds are not-for-profit entities that were originally designed for workers from a particular industry (but which are now open to all Australians).
Public sector funds are generally reserved for federal or state government employees, while corporate funds are arranged by companies for their staff.
You can also opt for a fifth type of fund, known as a self-managed super fund, 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 three reasons.
First, 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.
Second, 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.
Third, the funds themselves make changes, to things like fees and policies, which means that a fund’s ‘ranking’ is never set in stone.
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 options, 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 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 an amount equivalent to a percentage of their employee’s ordinary time earnings into their super fund. The superannuation guarantee is currently 9.5 per cent of a worker’s wage. It is legislated to grow to 10.0 per cent in 2021-22, 10.5 per cent in 2022-23, 11.0 per cent in 2023-24, 11.5 per cent in 2024-25 and 12.0 per cent in 2025-26.
You are eligible for the super guarantee if you are:
- 18 years old or over and;
- Earned more than $450 before tax in a month in full-time, part-time or casual work worker
- A temporary resident
- A contractor paid primarily for labour
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.
You can have early access to your super 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 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, the Association of Superannuation Funds of Australia’s retirement standard benchmarks from the June quarter of 2017 claim a single person with a ‘modest’ standard of living in retirement requires an annual after-tax income of $24270, while a ‘comfortable’ retirement for a single person requires $43,695 per annum. For a couple, the annual after-tax income needed is $34,911 and $60,063 respectively.
To find out how much super you will have to retire on, use the government’s super calculator.
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 is currently around $18 billion worth of lost super. 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 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 is 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 factor 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.
What should I look for in a superannuation fund?
Super funds in Australia roughly fall into four categories:
- Not-for-profit industry super funds that are open to anyone
- Corporate/company super funds arranged by an employer for its employees
- Commercial/retail super funds run by financial institutions and insurance companies
- Self-managed super funds that you manage yourself as a trustee
It’s worth doing some research or speaking to a financial planner when deciding which fund works for you. Some areas to consider are:
- Investment performance. Funds have different investment options, from high-risk options with a higher rate of return, to more a conservative approach in cash or fixed interest investments. Take the time to compare the five-year investment performance of different funds, as this will impact how much super you have at retirement. You can easily do this on the RateCity website.
- 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 tax-effective. Before choosing a super fund, find out what insurances they offer, if they come with limitations or health checks, and the premium they charge.
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.