Superannuation is an investment that is designed to provide money for your retirement.  When starting work most people begin their superannuation as their employer has to pay contributions.  You have the ability to top up the funds with your own money.   If you are self-employed then you have the option to choose whether or not you should have superannuation.

By compounding your superannuation investment over many years it can grow to a sizeable asset. Your superannuation is taxed less than other forms of investment. You can chose to have insurance in your superannuation including death and disability.

Superannuation: Understanding Its Importance and Advantages

Superannuation, or ‘super’, is a crucial component of Australia’s retirement income system. It’s designed to help Australians build a financial nest egg for their retirement. But what exactly is superannuation, and what are its advantages? This comprehensive guide aims to answer these questions.

What is Superannuation?

Superannuation is a long-term savings scheme set up by the Australian government to help citizens save for their retirement. Managed by a superannuation fund, it’s designed to accumulate savings during your working life, which can then be accessed once you retire or reach the ‘preservation age’ (currently between 55 and 60, depending on when you were born).

Super is primarily funded by compulsory contributions made by employers, known as the Superannuation Guarantee (SG). From 1 July 2024, the percentage rate for the Super Guarantee (SG) increased from 11% to 11.5%. Employers are required to contribute additional money into their employees’ super accounts in line with the higher SG percentage rate and this rate is set to gradually increase to 12% from 1st July 2025.

Advantages of Superannuation

1. Compulsory Savings for Retirement

One of the significant benefits of super is that it forces people to save for their retirement. With the SG, a percentage of your salary is automatically put into your super account, ensuring you’re regularly building your retirement savings.

2. Tax Benefits

Superannuation offers several tax advantages. Contributions made from pre-tax income, known as concessional contributions, are taxed at a concessional rate of 15%, which is lower than most people’s personal income tax rates. Additionally, investment earnings in the super fund are taxed at a maximum rate of 15%, often less.

3. Investment Growth

Super funds invest your money across a diverse range of assets such as shares, property, and bonds. This diversification, coupled with the long-term nature of super, allows your savings to grow over time, potentially delivering higher returns compared to other saving methods.

4. Insurance Coverage

Many super funds provide insurance options for their members. This can include life insurance, total and permanent disability (TPD) cover, and income protection insurance, often at a lower cost than obtaining similar cover outside super.

5. Variety of Investment Options

Most super funds offer a range of investment options, allowing you to choose one that suits your risk appetite and retirement goals. These options can range from ‘growth’ (higher potential returns but higher risk) to ‘conservative’ (lower risk but potentially lower returns).

Frequently Asked Questions

Q: Can I make additional contributions to my super?

A: Yes, in addition to your employer’s contributions, you can make extra contributions from your after-tax income or salary sacrifice a portion of your pre-tax income. However, keep in mind that there are annual limits on these contributions.

Q: Can I access my super before I retire?

A: Typically, you can only access your super once you reach your preservation age and retire. However, in certain circumstances, such as severe financial hardship or specific medical conditions, early access may be granted.

Q: What happens to my super if I change jobs?

A: If you change jobs, your super remains in your super fund. You can choose to keep the same super fund or move your super to a fund chosen by your new employer. It’s essential to keep track of your super and consider consolidating your super into one account to avoid paying multiple fees.

Q: How can I check my super balance?

A: You can check your super balance by logging into your super fund’s online portal, checking your statement, or registering for the ATO’s online services via myGov.

There are five main types of superannuation funds:

Retail Funds:  Open to the general public and run by financial institutions

Industry Funds:  Open to people in a particular industry or under a particular industrial award.   Some industry funds are open to the general public.

Corporate Funds:  Open to people working for a particular employer or corporation.  Many of the costs of operating the fund typically are covered by the employer.  Corporate funds generally are not open to the public.

Public Sector Funds:  Open to government employees, or are schemes established by law.

Self managed superannuation funds:  Must have no more than 6 members.  All members must be trustees of the fund and responsible for its management. Superannuation contributions may also be deposited into retirement savings accounts.  These are special accounts offered by banks, building societies, credit unions, life insurance companies and certain financial institutions.

Within these there are also two basic kinds of superannuation fund structures:

Accumulation Funds –  Where your retirement benefit depends upon how much you accumulate over your working life, which will be the money paid in plus investment earnings less expenses.

Defined Benefit Funds –  The value of your retirement benefit is defined by a set formula which may for example take into account your length of service and age at retirement.  Defined benefit funds are common in the public sector.  They are also used by some large companies.