What is superannuation?

What is superannuation?

Your superannuation is a pool of money that will be used to help fund your retirement. Throughout your working life, a small amount of the money you earn each year will be sent to your chosen super fund (instead of your bank account). The idea is that by putting aside a small chunk of your earnings on a regular basis from the day you start your first job, you should have enough money to live on when you retire.

Superannuation in Australia

Superannuation is Australia's system for retirement savings, similar to America's 401(k) or the UK pension system. The amount of money held in superannuation assets is currently $3.5 trillion, according to the Association of Super Funds Australia (ASFA). Almost half of that money (49%) is invested in Australian and international shares.

As of June 2019 (the most recent data), the average super balance for males is $162,280 and for females is $146,420. However, the average super balance varies greatly depending on your age group.

According to the latest retirement standard by ASFA you need a balance of $545,000 (or $640,000 for couples) to have a comfortable retirement. The standard age in which you can access your superannuation money is 65, however you may be able to access it earlier if you meet certain conditions.

How super works

If you're not exactly sure how super works, don't worry, you're certainly not alone. Finder data shows that 37% of Australians have little or no understanding of what superannuation is and how it works.

The main things to understand about super include the different types of super funds, the superannuation guarantee, how your money is invested and how compounded investment returns work to benefit your balance.

Types of super funds

Just like there are many different banks in Australia, there are many different super funds to choose from too (more than 100!).

Two of the main types of super funds are retail funds and industry funds. Retail super funds are owned by large financial institutions like banks or insurance companies, while industry super funds are not-for-profit and owned by members. However, it's more important that you compare super funds based on fees and performance rather than what type of fund it is.

The superannuation guarantee explained

The superannuation guarantee rate is the amount of money Australian employers are required to pay their employees towards their superannuation. The current super guarantee rate is 11.50% of what you earn annually.

This means that your employer must pay at least 11.50% of your annual income into your nominated super fund. While this is the minimum amount they need to pay, employers can choose to pay a higher super rate than this as a company benefit and a way to attract and maintain good staff. The super guarantee rate is scheduled to gradually increase by 0.5% per year until it reaches 12% in July 2025.

While the super guarantee is the minimum amount your employer is required to pay you, you can also make additional contributions to your super yourself on top of this.

Example of the super guarantee

Because the super guarantee is a percentage of your earnings this means the more you earn, the more super you'll be paid by your employer.

Let's say you work full time in an office and your annual base salary is $100,000. With a super guarantee rate of 11%, your employer would legally be required to pay you at least $11,000 into your super fund for the year. If the following year you got a pay rise and your salary increased to $120,000, your employer would then be required to pay you $13,200 for that year.

How the super guarantee is paid

Your employer is required to pay your super at least 4 times per year. Let's say you earn $100,000 and your employer needs to pay you $11,000 in super for the year. This would be broken down into 4 payments of $2,750 instead of the one lump sum payment. Employers can also choose to pay your super more frequently, such as monthly.

How your super is invested

The money in your super fund is then invested into a range of different assets like shares, commodities, property and cash on your behalf by the super fund investment team. When you join your super fund, you'll automatically be added to their default investment option that's suited to the majority of people.

However, you can choose a different superannuation investment option if you'd like to. A few reasons why you may choose a different investment option is if you'd like to take on more risk (e.g. high growth super funds), you want to reduce your risk (e.g. conservative super funds) or you want to invest more ethically (e.g. ethical super funds).

Compound investment returns

Your super benefits from compounded investment returns over your working life to help it grow. When the investments make positive returns, those returns are added into your super balance. Then, future investment returns are made on your entire balance (including the previous returns) which healps your balance grow much quicker.

Because it's essentially one large investment portfolio, your super balance may go down from time to time when the share market and the global economy is struggling (such as during times of recession). However, because your super is invested for such a long period of time, it'll almost certainly be worth a lot more by the time you reach retirement.

Finder survey: How happy are Australians with their current super fund?

Who is eligible for a superannuation account?

You are eligible to receive superannuation guarantee payments from your employer if you meet all of the following:

• You're an Australian resident, and
• You're 18 or older, or
• You're under 18 but work 30+ hours per week

If you're not currently employed you can still open a super account if you're over 18 and an Australian resident and make your own voluntary contributions.

Benefits of superannuation

There are many benefits of superannuation, some include:

• Save for retirement. Without superannuation, you'll need to rely on your personal savings and investments when you retire, which may not be enough money to live on.
• Paid by your employer. Your employer pays your super on top of your annual earnings - it doesn't come out of your pay.
• Tax discounts. Super contributions are taxed at the lower rate of 15%, not your standard income tax rate. Plus, when you eventually withdraw your super it's usually tax free.
• Insurance cover. Super funds also offer insurance cover, which is often cheaper than insurance policies outside of super.
• Managed for you. Your super investments are managed for you by your super fund, so you don't need to do anything.

How do I choose a super fund?

Here are the main things to look for when choosing a super fund:

• Low fees. Annual fees below 1.5% of your balance are generally considered to be on the low side.
• High returns. Look for high long-term performance returns over the past 7-10 years or more (10-year average returns over 7-8% p.a. are quite strong).
• Investment options. If you want to invest your super in an option that's not the default option, look for a fund that offers lots of investment choices.

If you need a bit more help, our best super fund picks could be a good place to start.

How to increase your super

There are a few different ways you can increase your super, including:

• Switch funds. Switching to a low-fee, high-performing fund will help give your balance a boost.
• Make voluntary contributions. You can contribute extra to your super yourself, on top of what your employer pays you.
• Consolidate funds. If you've got more than 1 super fund in your name, joining them into 1 fund will stop you paying fees on multiple accounts.
• Look for higher employer contributions. Some jobs and sectors will offer a higher super contribution to staff as a benefit or perk. Lots of government jobs offer this.

Frequently asked questions on superannuation

• What if my employer isn't paying super?

  Check you're eligible for super first (if you're a contractor you may not be eligible for super). Then, speak to your employer or HR department. If you have no luck with this, you can report your employer to the ATO who will investigate for you.

• When can I access my super?

  When you're retired, you can start withdrawing the money from your super fund. However, you can't simply retire at age 35 and gain access to your super. You also need to meet a minimum age requirement. For anyone born after 1964, the minimum age you can access your super is 60. There are some situations where you can gain early access to your super; however, these are mostly in extreme circumstances.

• How is superannuation taxed?

  Super contributions are generally taxed at the concessional super rate of 15%. This is often lower than your income tax rate. Additional voluntary concessional contributions you make are also taxed at this rate, until you reach your annual contribution limit.

• What is a Unique Superannuation Identifier (USI)?

  The USI is a number that is used to identify your super fund, and is often required from your employer so they can be sure they're paying your money into the correct fund. You can find your super fund's USI by doing a quick Google search, or by looking at a recent account statement.

• What's the best super fund to pick?

  The best super fund will be different for each of us but will always have low fees, high returns and investment plus insurance options that suit you. If you need a bit more help, our best super fund picks could be a good place to start.

• What if I leave Australia?

  If you're a permanent Australian resident and you decide to move overseas, your super will remain locked until you reach retirement age. If you earned superannuation while working in Australia on a temporary visa, you can apply to have your super released when you leave. You will need to pay tax on this. You can find more information on this by visiting the ATO.

• What happens to my super if I change jobs?

  Your super will come with you form job to job. When you start a new job, let your employer know your super account details so they can pay your super contributions into your existing fund.

• How does super work if I'm self employed?

  If you're self-employed, you're not legally required to pay yourself the super guarantee. However, it's definitely a good idea to pay yourself regular super contributions to ensure you have enough retirement savings. You can make contributions into your super fund just like a standard bank transfer.

Ryan is the founder and CEO at Tribeca Financial, a financial advice firm that listens, learns and then gets you on track. He's an accomplished financial advisor and financial wellbeing coach with over 15 years of experience.