In Australia, superannuation or super is a government-mandated system that ensures people can support themselves when they retire. Money from employers or individuals is usually deposited into what’s called a super fund, which you can generally select yourself. Some industries favour certain funds and your employer may discuss this with you when you start working for them. Ultimately, the choice of fund is usually yours though.
Employees earning more than $450 a month before taxes or working more than 30 hours a week qualify for mandatory super contributions from their employer. This is called the superannuation guarantee or SG. It requires employers to contribute a certain percentage of the eligible employee’s earnings to their super fund. In 2021, employers need to deposit 9.5 per cent, but this percentage is scheduled to increase in the future.
How does superannuation work for employees?
You may wonder how superannuation works for different types of employees. You can qualify for SG contributions from your employer as long as you exceed the earnings or employed time threshold - even if you’re a part-time worker. However, irrespective of your employer’s contribution, you can elect to put some of your earnings into a super fund. If you want to manage your own super, you can also set up a self-managed super fund (SMSF).
Some employers may also let you arrange to salary sacrifice part of your pre-tax wages. This reduces your taxable income while adding to your super balance If you’ve set up such an arrangement with your present employer, you should check whether you can continue such a setup when you change jobs.
You should keep in mind that managing a super fund can prove expensive as you’ll need to pay administration fees, investment charges for any transactions you conduct. Often, when you change jobs, you or your employer may end up creating a new super account, increasing the fees you need to pay. You can choose to roll over or transfer your super fund balance into the super fund chosen by your new employer. The latest superannuation reforms from the Australian government, which will come into effect in July 2021, are aimed at ensuring you can continue using the same super fund even after changing jobs.
How does self-funded superannuation work?
If you don’t wish to put your money in a bigger fund, you have the option of managing your super fund by creating a self-managed super fund. You can even include as many as three other family members or friends in your SMSF. But you’ll need to work on ensuring the fund contributions are well invested. Before starting an SMSF, it’s worth investigating whether you have the time for the administration and are aware of the legislative requirements.