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How does superannuation work?

Before you start a superannuation search, it’s important to understand how superannuation works. If you’re an Australian citizen and you’re employed by an Australian company, your employer has to make compulsory superannuation contributions on your behalf.

According to the Australian Taxation Office (ATO), the current super guarantee is 9.5 per cent of your pre-tax income. Given the fact that Australians are living longer into retirement, the rate is set to steadily increase to 12 per cent by 2025.

When you start a new job, you’ll need to provide your employer with details of your superannuation fund. If you don’t nominate a super fund, your employer will pay your compulsory contributions into a fund they nominate. Once they’ve received the contributions, your superannuation fund will invest the money on your behalf with the intention of growing your account balance steadily, until you retire.

This is why it's invaluable to keep track of your super, as you may find you've got super money in a number of funds open in your name - particularly from when you first started working. There may also be hundreds or thousands in unclaimed super in your name out there.

When you’re ready to retire, you can choose to access your super in a lump sum or take it as a regular retirement income stream or opt for a combination of the two. You may also supplement your income with the age pension, but keep in mind that your super balance and any assets can limit the age pension income you qualify for.

There are a few financial situations where superannuation contributions are not mandatory, including:

If you’re an employee and you earn less than $450 a month
If you’re under 18 and work less than 30 hours each week
If you’re not an Australian resident and you work outside Australia

Superannuation is also not currently compulsory for Australians who are self-employed. Even though it’s not mandatory, it’s recommended that self-employed Australians make super contributions and invest in their retirement.

How can you add to your super?

Employer contributions are generally the main source of super because it’s mandatory for all Australian employers to contribute to this. When you’re running a superannuation search, you may notice that there are various ways you can contribute to your super fund and boost your super balance.

Depending on how much you earn, you may choose to make concessional contributions to your superannuation account. To do this, you can arrange for your employer to salary-sacrifice a portion of your pre-tax salary into your super fund.

In addition to growing your super balance, there are some tax advantages to making concessional contributions. What you’re essentially doing is reducing your potential taxable income and taking advantage of the fact your concessional contributions will be taxed at just 15 per cent. There are limits, though, to how much you can contribute to your super via concessional contributions.

While concessional contributions are made from your pre-tax salary, you also have the option to make non-concessional contributions from your post-tax salary. This isn’t generally as tax-effective, and there are also limits on the amount you can contribute from your post-tax salary.

Low-income earners may be eligible for the government co-contribution if their income is below a certain threshold and they choose to make non-concessional contributions. Government co-contributions work by adding $0.50 for every post-tax dollar you deposit into your super balance. There is a cap on the amount the government will co-contribute. Low-income earners may also be eligible for the Low-Income Superannuation Tax Offset.

How to search for superannuation funds

With so many different options on the market, searching for a superannuation fund can be complicated.

When you’re conducting a superannuation search, it’s easy to get overwhelmed. You’re essentially looking for a super fund that fits your needs and gives you the greatest return on your contributions.

Here are the things you need to compare in your superannuation search:

Investment options

Start by looking at what investment options the fund offers and look at the historical performance to get a gauge on what type of returns you might be able to expect. While past performance is not a guarantee for future returns, looking back at the returns in the past five years may give you a very rough idea of the return you can expect.

When it comes to investment options, some people prefer having the flexibility to pick their investments. If you want a fund that lets you choose your investment based on industry or life stage, search for a super fund that suits your preference.

Depending on your level of interest and ability, some funds let members do their own investing. If you prefer a greater say in your investments, look for a fund that gives you the control to put your money where you want it. You may also opt for total control of your superannuation investments through a self-managed super fund (SMSF).

Some managed super funds offer an ethical investment option. If you prefer your funds to be invested in, say, renewable energies as opposed to mining, then search for a superannuation fund that offers the investment options you’re looking for.

Fees

As you cannot predict future returns, experts recommend focusing your superannuation search on funds with low fees. Generally speaking, the lower the fees, the better. As superannuation is generally a long-term investment, fees can add up considerably over time.

Not all fee structures are the same – some funds charge additional fees for extra services like advice or different types of investments. Before you make any decisions, find out exactly what the fees are for and work out if the costs outweigh the benefits. For a full breakdown of any potential fees, use the fund's online services to view its Product Disclosure Statement.

Insurance

When you’re searching for superannuation, you may notice different types of insurance offered by each fund.

The majority of superannuation funds will offer insurance as an option, and one of the advantages of taking insurance through your superannuation fund is that the policies are often discounted. Terms and conditions of insurance funds within super differ greatly, so do your research to make sure the type of cover holds up if you need it and that the premiums are worth the cost.

Common types of insurance within a super fund are:

Life insurance
Total and permanent disability (otherwise known as TPD insurance)
Income protection insurance

It’s worth noting that some funds offer insurance on an opt-in basis, which means that it’s not automatically enabled when you open the super account. If you want insurance, check the details to make sure you’re covered.

How to compare super performance

The tricky thing about super is that, unlike a home loan or credit card, you cannot just look to the interest rate and potential rate of return to compare your options. Just as no one could predict the COVID-19/Coronavirus pandemic, no one can predict the future, which is why super funds warn that past performance is not indicative of future results.

That being said, when comparing super funds, you are still able to view the past five years returns as a rough gauge of how your retirement savings may fair with said fund. And a super fund with a weak or strong performance history may also indicate how said fund invests its money and takes risks.

When searching for a superannuation fund, take a look at the super performance against other fund options, but don't take it as the sole reason to join the fund. Unless you have a crystal ball, experts recommend focusing your search on a fund with low ongoing fees.

How to switch your super fund

If you’ve spent some time searching for the right superannuation fund and you’ve compared your options, you may decide to switch super funds. Before you make the switch, look out for any exit or withdrawal fees you’d be charged for moving your super fund to a different fund. Some funds may penalise you for moving and, depending on your age, circumstances and super balance, this may affect your insurance cover and benefits.

In theory, making the switch is relatively simple and can be done anytime you want, but before you make any decisions, we recommend spending some time searching for a superannuation fund that fits your needs and lifestyle.

If you're still not sure how to switch your super fund, consider reaching out for financial advice from a financial adviser, or even speaking with an accountant.

Alex Ritchie

Personal Finance Editor

Alex Ritchie was a Personal Finance Writer and Editor at RateCity, and has been writing about Australian finance for over six years. Her expertise and passion covers loans, credit, superannuation, and closing the gender pay gap, and she aims to help young Aussies to overcome their financial apathy. Alongside RateCity, Alex has been published in numerous publications, including Australia's Money Magazine, Business Insider, Lifehacker Australia, and in health via NPS MedicineWise.

This article was reviewed by Personal Finance Editor Mark Bristow before it was published as part of RateCity's Fact Check process.

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^Words such as "top", "best", "cheapest" or "lowest" are not a recommendation or rating of products. This page compares a range of products from selected providers and not all products or providers are included in the comparison. There is no such thing as a 'one- size-fits-all' financial product. The best loan, credit card, superannuation account or bank account for you might not be the best choice for someone else. Before selecting any financial product you should read the fine print carefully, including the product disclosure statement, target market determination fact sheet or terms and conditions document and obtain professional financial advice on whether a product is right for you and your finances.

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