Superannuation

Planning for your future and choosing the right super fund for you.

Superannuation

In Australia, almost every worker has super – it’s a mandatory part of earning wages. But how does it work? What choices do you have, and how do you compare them? Learn the essentials of superannuation and how to make it work for you with this comprehensive guide.

What is superannuation?

Superannuation – or super, as it’s more commonly called – is money set aside from your wages or other income during your working life to provide for you in your retirement. While in Australia, retirees potentially have access to an old age pension via government services such as Centrelink, which is generally not a significant amount of money; normally just enough to provide for basic needs. Superannuation is intended to provide the wealth to give you a similar kind of lifestyle to what you’ve had during your working life after you retire.

There’s a lot of factors that affect this, of course, including the ebb and flow of your income over the years, the state of the Australian economy (which can affect the rate at which your super grows, or doesn’t grow, in some circumstances), and how long you live. Nevertheless, super is intended to give you the finances for a comfortable life in your retirement.

Superannuation is mandatory in Australia; if you’re working, you will have super. In fact, the term superannuation is very Australian. In other countries this might be called a pension or a retirement plan, and can work very differently. Globally, Australia ranks highly in terms of retirement schemes – the Melbourne Mercer Global Pension Index (a world standard on the subject) placed us third in the world in 2019.

How does superannuation work?

If you’re an Australian resident working in a regular job, you don’t need to do very much about super to make it work – you’ll need to fill in a form when you start your job telling them what superannuation fund you want to use (they’ll normally have a default option if you don’t want to choose), and after that your employer is responsible for paying a portion of your wages into super (currently 9.5%). This is known as the Superannuation Guarantee and it’s a legal requirement for employers. It’s just part of the process of paying someone’s wages.

Superannuation funds are organisations which exist to collect the money paid into super and grow it through carefully managed investments. Most super funds are large organisations that are heavily regulated and have diverse investment portfolios to control risk. What that means is that, under normal circumstances, you can be confident the money you have invested in super will be steadily growing over the years. Some offer better returns than others for slightly more risk and it’s possible that your super amount will fluctuate somewhat due to factors like changes in the stock market. But super is a long-term game – your money will be growing over the years you work.

When can I access my superannuation?

Under normal circumstances, your superannuation will become available once you’ve retired or reached the age of 65, even if you haven’t retired by that point. In Australia, you’re eligible to retire once you’ve reached what’s called preservation age, which can change depending on when you were born.

Date of Birth Preservation Age
Before July 1960
55
July 1960 – June 1961
56
July 1961 – June 1962
57
July 1962 – June 1963
58
July 1963 – June 1964
59
After June 1964
60

Generally, you can receive your superannuation as either a lump sum – that’s a single large payout of everything in your superfund – or as an income stream, which pays a certain amount each instalment (generally set by you) like a wage or salary. You can also do a mix of both – get a portion of your super as a lump sum, and keep the rest in the fund as an income stream.

There are advantages and disadvantages to each, but it’s worth remembering that super funds are a very tax efficient way to invest money and that every dollar still in your super fund will continue to earn more money over time. It’s always wise to compare options and choose carefully.

There are certain grounds under which the government will allow you to access the funds in your super before you reach retirement age, but these are quite specific. Trying to access your superannuation for other reasons, such as paying off debts, or standing in for a loan, is highly illegal and can attract significant fines and other consequences.

How can I increase my superannuation?

Many people are happy to simply get on with working and let super take care of itself. If you have an eye for the future, however, it’s possible to make additional contributions to your super and build it up more rapidly. There are advantages to doing this, as super is one of the most tax efficient ways you can save or invest your money. The catch is, of course, that it’s generally locked away and inaccessible until you retire.

A common way to contribute more to your super is what’s called salary sacrifice. Effectively, this means that your employer (at your request) pays you less taxable income, but contributes the rest of your wage into your super. The advantage of this is that the extra money going into super isn’t taxed, so you’re paying less tax in the long run – although you won’t see the money for a long time.

You can also contribute part of your after-tax wages into super and potentially claim a tax deduction back for this at tax time (yes, the government is very keen to encourage super contributions) and it’s even possible to contribute money into your spouse’s superannuation.

If you’re looking to maximize your superannuation in the long term, it’s worth considering if your current super fund is the best one for your needs. Different funds have different pros and cons, and can make a big difference to your super over the course of your working life. It’s worth taking some time to compare superannuation funds and see which one is the best option for you.

What types of superannuation fund are there?

There several different types of superannuation fund on the market, and it’s worth knowing the differences so you’ll be able to compare your options.

Retail funds

This is the most common type of super fund and the most readily available. They’re generally set up by banks or investment companies and run as a business. They’re normally available to anyone, and generally offer a wide range of investment options, insurance products, and financial advice. However, as a business they’re built to make a profit and may not be the best value option.

Industry funds 

These funds are set up to support a specific type of industry. Many of the larger ones will still be open for anyone to join, but some will be closed to anyone not working in the target industry. They’ll be different for each industry, but as a rule they’re not-for-profit, meaning profits go back to members. This can make them a good option.

Public sector funds 

These are generally government funds set up for public sector employees – you generally need to work for the government to join them. They may have limited investment options, but they’re often low-fee with options for low-cost insurance, which can make them quite attractive if you have the option.

Corporate funds

These funds are generally set up by a corporation to service the needs of its employees, so you need to work there (or have worked there previously) to be a member. They’ll often have better fees, insurance, and investment options for larger corporations. Some are also run more like an industry or retail fund.

 Self-managed super funds

These are private funds set up by an individual or small group (they can have up to four members, who also act as trustees). Although SMSFs have no membership fees, they’re a significant investment of time, money and effort to run and only really worthwhile for people with significant amounts of super who know what they’re doing.

Other types of funds 

There are a few other types of super funds around, such as eligible rollover funds (which collect lost super) and approved deposit funds. They’re not really worth worrying about when comparing funds for your own super, but it’s worth knowing they’re out there.

Type of Super Fund % of the Market (2020)
Retail funds
33.3%
Self-managed super funds
22.7%
Public sector funds
17.2%
Industry funds
15.5%
Corporate funds
8.7%
Other types of funds
2.6%

How did superannuation come about?

The idea of saving for retirement has been around for a long time in Australia, but has only become law in recent decades. In the 1800’s, certain government jobs came with a pension attached – a guaranteed income if you made it to retirement which made those jobs very attractive. Everyone else needed to save their own funds (which few could afford) or became dependant on their family in their old age.

In 1908, the Invalid and Old Age Pensions Act granted all Australians (in theory) a pension of £26 per year on their retirement. Soon after in 1915, income tax was introduced, but specifying that superannuation savings were tax exempt and contributions to super were tax deductable for employers. Not many low-income earners could afford super, so few workers or families had it set aside.

Various changes were made to the laws over the next 75 years to try and encourage investing in super, and these slowly increased the number of workers with superannuation. However, the biggest change came in 1991-1992, when the Australian Government introduced the Superannuation Guarantee, making it a legal requirement for employers to contribute 3% of a worker’s wages to super. Soon after, changes in 2005 saw workers able to choose their super fund.

The 3% figure rose over the next decade to 9%, and later to the current figure of 9.5%. This is also set to increase progressively in the next few years until it reaches 12% by 2025.

How to access your super before you reach retirement

There are some circumstances in which you’re allowed to make an early withdrawal from your superannuation. Let's look at look at some of the main ones.

Pros and cons of getting superannuation as a lump sum

The idea of getting your super as a single huge payout can be pretty tempting, with advantages and disadvantages to doing so.

PROS

You can clear outstanding debts, removing those financial obligations entirely.

You can purchase (or pay off) significant assets, such as a house, potentially lessening future expenses, or providing an income stream.

You have the potential to pay for large one-off expenses, such as a holiday.

Unless you’re re-investing it yourself, your money is now no longer exposed to market fluctuation – you don’t lose money if a global pandemic sinks the stock market.

CONS

Super funds are a very tax efficient way to invest your money. You might find it difficult to get equally good returns from the money you withdraw and don’t spend immediately.

You’re potentially cutting off the only income you’ll receive in your retirement, other than a relatively small government pension.

As you’re now managing the funds yourself, you’re responsible for making that money last through your remaining lifetime.

The temptation to spend on large one-off expenses – like a holiday – might significantly deplete your ongoing finances.

How do I choose the best super fund for my situation?

There’s a lot of funds out there, and many things that set them apart. Here’s some tips on how to compare Australian super funds.

Compare fees

Super funds have fees, generally charged each month and often after some action like switching investment strategies. Hunt around to see which are the most affordable for you and remember that you may have good value options that aren’t available to everyone, such as public sector funds, or industry funds.

Look at recent performance

Compare the performance of different funds over time to see how successful and reliable their investment strategies have been. Try to compare similar types of funds and investment strategies, and similar time periods (preferably the last few years), as those can affect the numbers.

Consider what insurance options are included

Many super funds have insurance products like income protection and life insurance available as part of the package. It’s worth comparing both the premiums, and also the amount of cover – just as you would with any insurance policy.

Think about the choices that the fund offers in terms of investments ​

Funds have different strategies for investments that you can select. It will often be a trade-off of risk versus return, but some might offer options like starting off with a high-return strategy when you’re young, and moving to a more cautious strategy later in life. Many people are also now asking whether their money is being used for ethical investments. When comparing funds, you should check that they have investment options that suit you.

Frequently Asked Questions about Superannuation

Check out the answers to some of the most common superannuation queries

How can I check on my superannuation?

Tracking your superannuation has recently become a lot more straightforward. Firstly, most major superannuation funds now have websites which allow you to log in and check on your super, as well as updating your details when needed. Secondly, the Australian Government website myGov (https://my.gov.au/) now allows you to link with government services such as Centrelink and the Australian Tax Office. Once your account is linked to the ATO you can quickly log on to see the balance in any super funds you have in your name – although new funds might take a few months to show up on the system.

Can I have more than one superannuation fund?

Yes. It’s actually not uncommon for people to have multiple superannuation funds, particularly if they’ve worked multiple jobs and chosen the default super fund each time, but it’s not ideal. Superfunds often have fees and costs associated with them for maintaining the fund. Generally this is only a small fraction of the amount earned each year, but with multiple super funds you can be paying those fees many times over. It’s normally a very good idea to consolidate your super together into a single fund. You can now do this fairly simply via a myGov account connected to the ATO.

What happens to my super if I leave Australia?

If you’re only leaving Australia temporarily, then it just stays where it is and continues accruing.  If you’re planning on leaving permanently, however, you can apply for a Departing Australia Superannuation Payment (or DASP). This – if approved – will mean your super gets paid out to you as a lump sum. It can also be heavily taxed in the process, so be aware of that.

Should I get a self-managed superannuation fund?

It’s possible, but it’s a big decision. A self-managed super fund (or SMSF) is a big deal that takes time, energy, and money to run. On average, people running a self-managed super fund might spend around 100 – 200 hours a year on it – that’s 1-2 full days of work every month. There’s also risks and costs involved, and you need to know what you’re doing. Unless it’s something you understand well and are committed to, it’s probably better to pass on that one.

 

 

What happens to my superannuation if I die?

You normally nominate a beneficiary for your super fund. Should you die, your superannuation gets paid to your beneficiary. This is often a lump sum, although in some cases it could be paid as an income stream, giving your dependants an income to live off while the money lasts. Many super funds will allow you to set or change your beneficiary via your account on their website. If you haven’t nominated a beneficiary, a trustee of the super fund will decide to whom it should most sensibly be paid – similar to if someone dies without a will.

What's a defined benefit superannuation fund?

A defined benefit fund is a type of super fund that guarantees a certain return on your super, regardless of market fluctuations or other financial factors. They’re becoming rare now as they involve the fund taking on more of the risk –

if the stock market has a bad year, it’s their problem, not yours. As such, they’re often regarded as quite desirable, and you’d want to get good advice if you’re thinking of leaving one – they’re not something everyone has access to, so that may well be a one-way door.

What if my employer isn't paying me the right amount of super?

Sometimes it’s possible that an employer won’t be paying as much into an employee’s super fund as they should. You can generally check your super payments on your payslip, and talk to your employer if something doesn’t seem to add up. If they’re deliberately underpaying super, that’s quite serious and you should contact the ATO.

What happens if I lose track of some of my super?

It’s possible to lose track of one of your superfunds, especially a small amount of super from a short-term job; perhaps your mail is going to an old address, for instance. The good news is that now your lost super will come looking for you. The ATO now has laws in place meaning that funds with inactive, low balance accounts are now required to transfer that money to the ATO, which then deposits it into one of your active super funds. Remember that the sooner those funds get consolidated into an active fund, the sooner they can be working for you.

 

Can my super amount ever decrease?

The way superannuation gains value is through your super fund investing your money. Although they do what they can to mitigate financial risk, there can be bad years and accumulation funds (the most common type of super fund) can be affected by major financial upheaval such as a stock market crash or a global pandemic. However, super funds exist specifically to increase your super balance over time; it’s their job to make sure those losses are recovered and your super gets back on track. A fund that consistently lost money for its members wouldn’t stay in business very long.

Why does the government want mandatory superannuation?

The government benefits from a strong, universal superannuation system. Because superannuation comes out of your wages, it means you’re effectively paying for your own retirement – and the government isn’t supporting an entire generation through the old age pension. This is particularly significant with the average age of death increasing, meaning people are living longer after retirement. It’s good news for us though, as it means retirement savings are simply built into the basic structure of our wages in Australia and we end up with one of the best retirement income systems in the world.