If you are looking for a job in Australia, you may have noticed that many job ads mention superannuation, or ‘Super’, as part of the salary package. But what exactly is superannuation, and why is it important?
Superannuation is a mandatory system in Australia that helps you save for your retirement. It is money that your employer puts aside for you on top of your regular income. The more super you have, the more comfortable your retirement will be. However, superannuation can be complex and confusing, especially if you are unfamiliar with the Australian system.
That’s why we have created this guide to help you understand the basics of superannuation and how it works. In this guide, you will learn about:
- The benefits of superannuation and how much you can expect to receive.
- The different types of superannuation funds and how to choose the best one for you.
- How contributions work and how to boost your super savings
- How investment options work and choosing the best one for you.
- How to access your superannuation when you retire or in certain circumstances
- How insurance works through superannuation and how to check your level of coverage.
By the end of this guide, you will better understand superannuation and how to make the most of it. Whether you are already working in Australia or planning to move here, this guide will help you prepare for your future retirement.
Now, let’s delve deeper into superannuation, its different aspects, and what it means for you as a potential employee in Australia.
Section 1: The Basics of Superannuation
Superannuation is a mandatory system in Australia designed to provide income for individuals in their retirement. Employers must pay a percentage of an employee’s earnings into a super fund. This is called the ‘super guarantee’.
They pay these contributions on top of your salary and wages. From 1 July 2022, your employer may need to contribute to your super regardless of how much you are paid monthly. If you’re under 18, you must work more than 30 hours a week to be eligible.
This applies whether you work casual, part-time or full-time hours and if you are a temporary resident. You may also be eligible if you are a contractor who is paid primarily for labour, even if you have an Australian business number (ABN).
The current Superannuation Guarantee rate for the 2023-24 financial year is 11%. This means that employers must contribute an amount equal to 11% of an eligible employee’s ordinary time earnings to their superannuation fund.
As an employee, you can choose which super fund you want your employer to pay your super into. You can do this by filling out a standard choice form and giving it to your employer. If you don’t choose a fund, your employer will pay your super into their nominated fund, or ‘default fund’.
However, if you already have a super account from a previous job, it will be linked, or ‘stapled’, to you and follow you as you change jobs. This is called the “stapled super fund” system, which the Australian Government introduced on 1 November 2021. This system aims to reduce the number of multiple super accounts and fees that people pay.
The amount of super you will receive depends on how much you earn and how long you work. For example, if you earn $50,000 annually and work for ten years, your employer will contribute $55,000 to your super fund (11% of $50,000 x 10). However, this is a partial amount you will have in your super account, as it will be affected by factors such as investment returns, fees, taxes, and inflation. You can use a superannuation calculator to estimate how much super you will have when you retire.
Section 2: Types of Superannuation Funds
There are four main types of superannuation funds in Australia: retail funds, industry funds, public sector funds, and self-managed super funds (SMSFs). Banks or investment companies usually run retail funds, while industry funds are tied to specific industries, like health or construction. Public sector funds are designed for federal, state and local government or statutory authorities employees, and SMSFs are private funds you manage yourself.
Each type of fund has its pros and cons. For example:
- Retail funds often have a greater choice of investment options and services but may also charge higher fees and commissions than other funds. They may also be influenced by the interests of their shareholders or owners.
- Industry funds typically have lower fees and commissions than retail funds but may also have fewer investment options and services. They may also be influenced by the interests of their industry associations or unions.
- Public sector funds usually have low fees and generous benefits for their members, but they may also have limited investment options and services. They may also be subject to government regulations and changes.
- Self Managed Super Funds (SMSFs) provide more control and flexibility over investments and tax strategies but also have significant legal and administrative responsibilities. They may also have higher costs and risks than other funds.
To help you compare different super funds, you can use a comparison tool or a quiz. You can also check the ratings and reviews of different funds from independent sources, such as SuperRatings or Chant West.
Section 3: How Contributions Work
Super contributions are made up of mandatory employer contributions, personal contributions, and government contributions.
- Employer contributions are the super guaranteed payments that your employer makes to your super fund on your behalf. They are calculated as a percentage of your ordinary time earnings, which include your salary, wages, commissions, bonuses, and allowances. They do not include overtime, leave loading or fringe benefits.
- Personal contributions are the voluntary payments that you make to your super fund from your after-tax income. You can make personal contributions to boost your super savings or to claim a tax deduction. However, you must meet specific eligibility criteria and follow the rules to claim a tax deduction for your personal contributions.
- Government contributions are the payments the government makes to your super fund to help low-to-middle-income earners save for retirement. Two types of government contributions exist co-contributions and low-income super tax offset (LISTO). Co-contributions match the government’s payments to your super fund if you make personal contributions and meet the income and other eligibility requirements. LISTO is a refund of the tax paid on your employer or personal contributions if you earn less than a certain amount and meet the eligibility requirements.
Tax benefits are associated with super contributions and caps on how much you can contribute each year. For example:
Employer and personal contributions that are claimed as a tax deduction are taxed at 15% in your super fund, which is usually lower than your marginal tax rate. However, those earning more than $250,000 per year may have to pay an additional 15% tax on these contributions.
Personal contributions that are not claimed as a tax deduction are not taxed in your super fund, as they are made from your after-tax income. However, they may be subject to tax when you withdraw them from your super fund.
Government contributions are not taxed in your super fund, but they may be subject to tax when you withdraw them from your super fund.
The annual cap for employer and personal contributions that are claimed as a tax deduction is $27,500 for the 2023-24 financial year. If you exceed this cap, you may have to pay extra tax on the excess amount or withdraw it from your super fund.
The annual cap for personal contributions that are not claimed as a tax deduction is $110,000 for the 2023-24 financial year. However, you may be able to bring forward up to three years of this cap if you meet certain conditions. If you exceed this cap, you may have to pay extra tax on the excess amount or withdraw it from your super fund.
Boosting your super contributions
There are other ways to boost your super savings, such as:
– Salary sacrificing is an arrangement where you agree with your employer to reduce your salary or wages in exchange for additional employer contributions to your super fund. This can reduce your taxable income and increase your super savings.
– Spouse contributions are personal contributions you make to your spouse’s super fund. You may be eligible for a tax offset of up to $540 if you make spouse contributions and meet the income and other eligibility requirements.
– Downsizer contributions are personal contributions you make to your super fund from the proceeds of selling your home. You may be able to make downsizer contributions of up to $300,000 per person if you meet the age and other eligibility requirements.
Section 4: Investment Options
Super funds invest the money they manage to grow it over time. Different funds offer different investment options, such as growth, balanced, conservative, and more. The choice of investment can affect your super’s risk level and potential return.
- Growth options invest primarily in assets with the potential for high returns over the long term, such as shares and property. They also have a higher level of risk and volatility, which means they can experience more significant fluctuations in value.
- Balanced options invest in a mix of assets that aim to provide moderate returns over the medium to long term, such as shares, property, bonds, and cash. They also have a moderate level of risk and volatility, which means they can experience some fluctuations in value.
- Conservative options invest primarily in assets that provide stable returns over the short to medium term, such as bonds and cash. They also have a lower level of risk and volatility, which means they can experience more minor fluctuations in value.
The best investment option for you depends on your circumstances, such as age, risk appetite, time horizon, and goals. For example:
- If you are young and have a long time until retirement, you may prefer a growth option that can provide higher returns over the long term. However, you must also be comfortable with the higher risk and volatility involved.
- If you are close to retirement or already retired, you may prefer a conservative option that can provide stable returns over the short to medium term. However, you also need to consider the impact of inflation and taxes on your super savings.
- If you are somewhere in between, you may prefer a balanced option that can provide moderate returns over the medium to long term. However, you also need to be prepared for some fluctuations in value.
You can choose an investment option that suits your needs and preferences or let your super fund decide for you based on your age or life stage. You can also change your investment option anytime, but you may have to pay fees or taxes for switching.
To help you choose an investment option, you can use a risk profile tool or a retirement planner. You can also check the performance and fees of different investment options from independent sources, such as SuperRatings or Chant West.
Section 5: Accessing Superannuation
You can usually access your superannuation when you reach your preservation age and retire when you turn 65 (whether you’ve retired or not) or under the transition to retirement rules while continuing to work.
There are very limited circumstances where you can access your super early. These circumstances are mainly related to specific medical conditions or severe financial hardship.
- Your preservation age is the minimum age at which you can access your super if you are retired. It depends on when you were born and ranges from 55 to 60 years old. You can check your preservation age here.
- Retirement means that you have permanently stopped working and have no intention of working again for more than 10 hours per week. You must declare this to your super fund when you access your super.
- Transition to retirement rules allow you to access some of your super as a regular income stream while working part-time or full-time. This can help reduce your working hours or boost your savings before retirement. However, there are restrictions and tax implications involved.
- Early access to super is only possible in very limited circumstances, such as compassionate grounds, severe financial hardship, terminal illness, or permanent incapacity. You must meet strict eligibility criteria and provide evidence to support your claim. You must also know the tax implications and potential impact on your future retirement income.
There are different ways to access your super, such as:
- Lump sum is a one-off payment of some or all of your super balance. You can withdraw your super as a lump sum when you meet a condition of release, such as retirement or turning 65. However, you may have to pay tax on the amount you withdraw, depending on your age and the components of your super balance.
- Income stream is a series of regular payments of your super balance over time. You can start an income stream when you meet a condition of release, such as retirement or reaching your preservation age. However, you need to have a minimum amount of super to start an income stream and follow the rules on how much you can withdraw each year. Depending on your age and the components of your super balance, you may also have to pay tax on your payments.
- Combination is a mix of lump sum and income stream payments. You can choose a combination of both when you meet a condition of release, such as retirement or turning 65. However, you need to consider the tax implications and the longevity of your super savings.
The best way to access your super depends on your circumstances, such as age, income needs, tax situation, and goals. For example:
- If you need a large amount of money for a specific purpose, such as paying off debt or buying a home, you may prefer a lump sum payment. However, you also need to consider the impact of tax and inflation on your super savings.
- If you need a regular income for living expenses, such as bills or groceries, you may prefer an income stream payment. However, you must also consider the impact of investment returns and fees on your super savings.
- If you need a combination of both, you may prefer a mix of lump sum and income stream payments. However, you must also consider the balance between flexibility and security for your super savings.
To help you decide how to access your super, you can use a retirement income tool or a super withdrawal calculator. You can also seek advice from a financial planner or contact the Australian Taxation Office.
Section 6: Insurance Through Superannuation
Most super funds offer insurance options as part of their service. This can include life insurance, total and permanent disability (TPD) insurance, and income protection insurance. It’s important to assess your personal circumstances and consider what kind of cover you need.
- Life insurance pays a lump sum or an income stream to your beneficiaries or your estate when you die. It can help your family pay for funeral costs, debts, or living expenses.
- TPD insurance pays you a lump sum or an income stream if you become permanently disabled and unable to work. It can help you pay for medical costs, debts, or living expenses.
- Income protection insurance pays a regular income to you if you become temporarily disabled and unable to work for a certain period of time. It can help you pay for bills, debts, or living expenses.
The benefits of having insurance through super include:
- Cost-effectiveness, as the premiums are usually cheaper than buying insurance outside super. This is because super funds can negotiate bulk discounts with insurers and pass on the savings to their members.
- Convenience, as the premiums are automatically deducted from your super balance, and you don’t have to manage them separately. You also don’t have to undergo medical tests or provide health information to get coverage.
- Tax efficiency, as the premiums are paid from your pre-tax income and reduce your taxable income. You may also be able to claim a tax deduction for some types of insurance premiums.
The drawbacks of having insurance through super include:
- Reduced super balance, as the premiums reduce the amount of money available for your retirement. You must also have enough money in your super account to pay for the premiums. Otherwise, your cover may lapse.
- Limited cover, as the amount and type of cover may not suit your needs or preferences. You may also lose your cover if you change jobs, switch funds, or stop contributing.
- Delayed payout, as the payment may take longer to reach you or your beneficiaries due to the involvement of your super fund and the trustee. Depending on your age and the components of your super balance, you may also have to pay tax on the payment.
To help you compare insurance options and check the level of coverage, you can use an insurance calculator or a comparison tool. You can also read your super fund’s product disclosure statement (PDS) or contact them directly.
Superannuation is an essential part of planning for your retirement in Australia. It is money that your employer puts aside for you on top of your regular income. The more super you have, the more comfortable your retirement will be. However, superannuation can be complex and confusing, especially if you are not familiar with the Australian system. That’s why we have created this guide to help you understand the basics of superannuation and how it works. In this guide, you have learned about:
- The benefits of superannuation and how much you can expect to receive
- The different types of superannuation funds and how to choose the best one for you
- How contributions work and how to boost your super savings
- How investment options work and how to choose the best one for you
- How to access your superannuation when you retire or in certain circumstances
- How insurance works through superannuation and how to check your level of cover
We hope this guide has helped you understand superannuation and how to make the most of it. Whether you are already working in Australia or planning to move here, this guide will help you prepare for your future retirement.
Remember that the rules around superannuation can change, so staying up-to-date with the latest information is essential. Consider subscribing to newsletters from the Australian Taxation Office or your super fund to keep informed.
Remember, the information in this guide is intended to be general in nature. Everyone’s circumstances are different, and what works for one person may not work for another. Always consider your personal situation and seek advice from a professional before making decisions about your superannuation.
Any Comments or Questions?
If you have any questions or comments about this guide, please feel free to leave them below. We would love to hear from you and help you with any queries you may have. Thank you for reading, and happy saving!