Your super matters – after all, it's your money. There's a lot to know about how superannuation works, what it's for, how it's taxed and the types of funds that can take care of your super for you. We've put together this handy guide to introduce what super is all about, so you can make more informed decisions about your super.
What is superannuation?
Your superannuation, often called your super, is a way of saving up money for your retirement. For some, it's money that your employer sets aside for you in addition to your regular income. In some cases, you can also make voluntary contributions. This money usually cannot be accessed until you reach retirement and what’s called 'preservation age' – somewhere between 55 and 60 depending on the year that you were born. Super is meant to support you through retirement, so there are restrictions on accessing your super early.
Since super is meant for your retirement, you can think of it as your nest egg. It's an investment which usually earns interest over time, so it's designed to increase in value the longer you hold on to it. Retirement might seem a long way off if you're still pretty young. But time is on your side and thinking about your super early can help in the long-run through the power of compound interest – that is, interest earned on interest already acquired.
How does superannuation work?
Superannuation investment is a complex topic with lots of moving parts, regulations and variables that can make it tricky to wrap your head around. While you don't need to understand all the ins-and-outs of how superannuation works, the following explanation can help give you an idea of how super investment works for many people.
When you get paid, your employer will set aside some extra money to go towards your super. This money is paid into an account against your name and becomes part of a much bigger pool of money – a pool which is contributed to by anywhere between a few or even millions of other people. The organisation which controls this pool of money is referred to as a 'super fund' and it's their job to make good use of this big pool of money.
Super funds invest the money entrusted to them into a variety of investment markets, including shares, bonds, cash, foreign currencies, property and infrastructure. Their job is to keep people's hard-earned super safe, while also earning a profit on those investments. When super funds make a profit on their investments, contributors to the fund can earn interest on their super and increase the amount of money they have when they retire.
This is a pretty basic explanation of how super really works and there are lots of people who have different situations. For instance, there are a number of different types of super funds, and each one often controls several different pools of money and invests them differently based on the amount of risk that investors elect to allow.
Compulsory employer super contributions
Your employer is generally required to make compulsory, regular contributions to your super account. This is in addition to your regular income and does not come out of your pay. This compulsory amount is called the ‘super guarantee’ and as of February 2021 is currently 9.5% of your total ordinary earnings, including salary, certain bonuses, allowances, and some paid leave. The super guarantee is set to gradually increase to 12% in coming years.
Generally, you are eligible to receive compulsory employer super if you are:
• 18 years or older and paid >$450 pre-tax in a calendar month
• Under 18 years old and paid >$450 pre-tax in a calendar month and work ≥30 hours in a week.
Additional super contributions
You can also make voluntary contributions to your super fund on top of compulsory employer super contributions. If your employer allows it, these may be made out of your pre-tax income as part of a salary sacrifice arrangement, otherwise you can make these contributions out of your after-tax income and deduct part of the contribution at the end of the financial year.
If you fall into an eligible income bracket as a low or middle-income earner, you may also be eligible for super contributions from the Australian Government too. These come in two forms: a super co-contribution, and a low-income super tax offset (LISTO). Each of these are worth up to a maximum of $500 and have their own eligibility requirements.
How does tax and super work?
You can be taxed on your super in a few different ways:
• When you or your employer contribute out of your before-tax income;
• When you make an after-tax contribution beyond certain limits;
• When you earn interest;
• When you withdraw super as a lump sum or an income stream.
Each of these have their own criteria, exceptions and eligibility conditions which you can read about in depth here. An important thing to note is that employer contributions and voluntary salary sacrificed contributions are both taxed at 15% for people who earn between $37,000 and $250,000 in a financial year.
Choosing a super fund
Generally, super contributions begin when you start your first job. Your employer might suggest a fund for you that they prefer, but you can choose a different one if you like. You could spend some time familiarising yourself with the different types of super funds. A good place to start if you want to compare your options is to:
• Compare your fund/the recommended fund’s performance with others;
• Compare super investment options;
• Compare fees;
• Check details about insurance (which some super includes) before you change funds
• Find your 'lost super' if you have any (that is, consolidate any existing accounts you might have forgotten);
• Keep an eye out for super scams that promise illegal early access to super.
Super is personal
Hopefully this article has given you a better understanding of what super is, how it works, and why it matters for you. Super is designed to help you in your retirement years but getting it in order long before retirement can really help you in the long run. Making informed decisions early on and revisiting those decisions regularly can give you more money to live on in the future.
It’s important to remember that super is a complex and personal matter — what works for one person might not work for everybody.