Superannuation

Superannuation as a means to save for retirement

The main benefit of superannuation is that it will help you fund your retirement for a time when you will no longer working and earning an income; with your balance of super building-up over time from when you start working through to the day you retire. 

Superannuation is one of the main ways Australians can save for their retirement. However there is often a lot of jargon used by people when talking about superannuation, which can often be confusing to people when planning for their retirement. Therefore, understanding the basics can help you determine what kind of account you get and whether it’s right for you.

In this article, we break down the complexity surrounding superannuation by discussing what it is, how it works, and what types are available. We also discuss the essential information about different investment options to help you make wise decisions.

In superannuation, many rules and regulations apply. Nonetheless, the process will be much easier if you know what to do.

Superannuation and How It Works

Superannuation is a pension program designed to help employees secure a retirement plan. The way it works is that deposits are made into a super account which grow over time, usually without tax implications, until the eligible person retires and enjoys the benefits of the funds they have accumulated in super over their working life.  
Employers pay an extra 11% (for the 2024 year) as contribution, called the superannuation guarantee (SG), on top of the employee’s salary. This will increase to 11.5% in the 2025 year. 
Employees who are under 18 are eligible for super if they work more than 30 hours in a week, regardless of how much they’re paid. 

For seniors and retirees above 55, there are specific tax and superannuation matters that should be considered. Factors vary depending on whether they’re still working, planning to retire, getting into retirement or already retired.

Employees can choose their super fund, except when the fund is specified in an industrial agreement and if the person is working in the public sector. There are separate conditions that apply in this case. 

Super funds are accessible during the time of retirement in the form of lump sum and super pension. Withdrawals are generally free of tax. However, there may be tax implications for those below 60.

For example, if you’re younger than the preservation age and you decide to take money from your super, you may have to pay 22% tax plus Medicare levy or the marginal rate, whichever is lower.

Early withdrawal from super funds is allowed under certain conditions such as financial hardship, disability, terminal illness, or death.

While there is no maximum withdrawal, many retirees are usually cautious of getting money out of their super funds for fear of not having enough finances later on. 

Taxation benefits of superannuation

The Australian government has provided tax incentives to encourage Australians to save for their retirement, through superannuation.

If you are employed, your employer is legally required to pay superannuation contributions into your super fund. These contributions are to be a minimum of 11%  (for the 2024 year) of your annual salary, increasing to 11.5% for the 2025 year. However you are able to contribute up to $27,500 (called the concessioanl cap) each year as concessional contributions. This cap will increase to $30,000 in the 2025 year. You can make additional concessional contributions to your super fund by either salary sacrificing  amounts from your wages or by contributing amounts with your after tax money and claiming the amount as a tax deduction.  If the balance in your super fund is less than $500,000 on 30 June in the previous financial year, you may be able to contribute more than the concessional cap, as you can carry forward unused cap amounts from up to 5 previous financial years, including when you were not a member of a super fund.

The super fund will pay tax on concessional contributions at a rate of 15%, but if you are a middle or high income earner, this is less than your marginal tax rate, so you will be saving tax by making additional super contributions. If your income is over $250,000 you will have to pay an additional 15% tax on your concessional contributions, but the overall 30% tax is still significantly lower than your marginal tax rate of 45% plus medicare.

If you are self-employed, your superannuation contributions may be tax deductible, which means that payments you make into your super (up to the concessional cap) can reduce your taxable income which can therefore reduce the amount of tax you will pay. 

The super fund will pay tax on concessional contributions at a rate of 15%, but if you are a middle or high income earner, this is less than your marginal tax rate, so you will be saving tax by making additional super contributions. If your income is over $250,000 you will have to pay an additional 15% tax on your concessional contributions, but the overall 30% tax is still significantly lower than your marginal tax rate of 45% plus medicare.

A further tax benefit is that investment earnings in your superannuation fund are taxed at lower rates of 15%, compared to earnings from investments that are outside of super which are taxed at higher marginal rates (which could be as high as 45% if you are a high-income earner).  

When you retire and you are ready to access your super, it's usually available as a tax-free income stream or as a lump sum payment.

Types of Super Funds

Choosing the right type of super fund can be the key to long-term benefits. You should consider certain factors when you decide which of the following options would be best suited for your pension plans: 
 

• Industry Super Fund

This type of super fund is generally established by trade unions and industry bodies with an Australian Financial Services Licence (AFSL) to provide support for the retirement fund of their members. 

Industry funds are also called members-first or profit-for-members funds.  Any profit made is given back to members in better member services or financial products, rather than the shareholders being compensated in the form of dividends. 
 

• Retail Super Fund 

Retail super funds are commonly owned and managed by recognised financial institutions publicly recognised companies, such as banks and wealth management companies. Although the primary function of a Retail Fund is to help members save enough money for their retirement, they are also run to generate a profit for their shareholders.

Well known Retail Funds are AMP, Commonwealth Bank, ANZ, Westpac, Suncorp and ING.
 

• Self-Managed Super Funds (SMSFs)

Self Managed Super Fund (called SMSFs) are a way of saving for your retirement, however the key difference of this type of Fund is that it is ‘self-managed’ by the members, who are usually also the trustees. 

Members of the SMSF are required to operate the Fund for their benefit, which is to be for the sole-purpose of saving for retirement. Members of a SMSF are fully responsible for complying with the superannuation and tax laws, including operating the Fund for all investment decisions. 
 

• Public Sector Funds

This fund is generally open to the commonwealth, state and territory government workers. Public sector employers may provide defined benefit funds and constitutionally protected funds (CPFs). 

Membership for Public Sector funds are usually limited to public sector employees. 
 

• Corporate Funds 

This super fund is where the employees of companies may be offered the opportunity for their superannuation contributions to be paid into a super fund that is managed by the employer, for the benefit of its workers.  

Pros and Cons of Superannuation

Superannuation, like any other long-term investment, comes with pros and cons. To make sure that you can get the right investment strategy, you have to consider the following advantages and disadvantages: 

Advantages of superannuation
 

• Steady Income Stream During Retirement

The primary purpose of superannuation is to make sure that Australians can enjoy a steady retirement income stream, even if they are no longer working. Generally, it is considered an ideal retirement saving strategy because the amount of the super fund is defined.  
 

• Eligibility Is Easy to Meet

Formal employment would mean that automatic contributions are paid from the employer. Under-aged, domestic, and other private labourers who work for 30 hours or more are also qualified. 
 

• Professional Management of Funds

Professional fund managers are hired by companies to handle employees’ contributions. The services of these professionals is to ensure that super contributions will be credited to your chosen super retirement savings. 
 

• Contributions from Employer

Employers are obliged to provide separate guarantee contributions to the employee’s super account. This process prevents that amount from becoming a deduction from the pre-or post-tax income. 
 

• Government Support

Employees whose income falls below the threshold can benefit from the additional contribution from the government up to $500. They should, however, meet the criteria set by the government to be eligible for co-contribution. 
 

• Compound growth

Your super compounds with earnings gained from investments in your super fund, which are reinvested (again) so that you earn investment returns on your investment returns; a process which is repeated over time to compound your earnings.  

Disadvantages of Superannuation
 

• Limited Access

The funds deposited are intended for income protection or a steady income stream upon retirement. For this reason, super fund holders cannot access their accounts for a predefined period. 

However, certain conditions allow early withdrawals, such as financial hardship, total permanent disability (TPD), and terminal illness. 
 

• Multiple Super Accounts

Some employees often change jobs, accumulating multiple super accounts under their names throughout the lifecycle. 

There will be various fees and taxes that the employees may have to pay for different accounts. 

If you have multiple super funds, it may be advisable to combine them. This can be done through your mGov account with the ATO or by contacting the super funds. With the introduction of Stapled Super Funds for employees, multiple super funds should be less of a problem in the future.

A stapled super fund is an existing super account which is linked, or 'stapled', to an individual employee so that it follows them as they change jobs. Employers may now have to request their new employees 'stapled super fund' details from the ATO.
 

• Higher Super Fund Management Fees 

Professional fund managers may charge different rates. The amount depends primarily on where your super fund is contributed. 

In some cases you may be paying more for the same package another company is offering at a lower rate.

Superannuation Investment Options

Choosing your superannuation investment growth option is a crucial decision to make. You have to evaluate which investment options suit your personal circumstances. 

The following are your choices for superannuation investment: 
 

• Growth 

The returns in this investment can have a higher value over a long period. But this could also mean higher losses during unfavourable working life years than other options with lower-risk rates. 
 

• Balanced

Generally this investment option aims to get reasonable and consistent returns. Therefore the losses in this option can occur less frequently than in the growth investment option. 
 

• Conservative

A conservative investment’s goal is to reduce the risk of loss by accepting lower fees or returns over the long term. Chances of encountering bad seasons are minimal compared to the balanced or growth options. 
 

• Cash

Cash investment is in 100% in deposits with Australian deposit-taking institutions, or as stated in a capital-guaranteed life insurance policy. The goal of this option is to provide a guarantee that investment losses cannot reduce the capital and accumulated earnings. 
 

• Ethical 

The main goal here is to screen and eliminate investments that fall below the criteria of social, environmental, and governance standards. 

An ethical option can have risk rates that fall under any of the other investment options.

Comparing Super Funds: How and Why It is Important

Superannuation is a crucial decision to make. It can affect your life after retirement and even your finances before reaching the preservation age. 

Comparing several age pension options can help you decide which super fund best fits your goals and lifestyle. 

Consider the following when making comparisons:
 

• Focus on what you need
• Explore all options
• Study the investment market
• Consider investment performance history
• Calculate the costs
• Never forget the insurance
• Follow the leads on the best super funds

There are now online search and comparison tools you can use when looking for super ratings and evaluating your options for superannuation. You can benefit from these technologies when you know exactly what you are trying to compare based on a set of criteria.

 Switching Super Funds

Changing super funds is a straightforward process that can be completed online. To avoid any unfavourable consequences of switching super funds, here are steps to consider before switching: 
 

• Check the super fund’s PDS (product disclosure statement)
• Explore your investment options and evaluate the risks
• Investigate contribution reports and transparency of investment providers
• Look for ideal features, such as a user-friendly online platform, streamlined on-boarding process, and contact options that don’t have a transistor radio
• Analyse the insurance cover based on past performance. 

Shopping Tips for the Right Super Fund

As a practical guide, when looking for the right super fund, you can follow these tips:
 

• Compare investment performance over the last five years, and consider the impact of taxes and fees
• Super funds with low fees are a good choice 
• Compare the insurance premiums, amount of cover, and any terms that might affect you
• Choose the best super fund investment according to your criteria
• Additional services like financial advice or financial services guides can be advantageous

A key factor to growing your super account over time is by being in consistently high-performing funds. Investors in poor-performing super funds may face the risk of substantially lower super balances during retirement. 

Keep in mind also that the investment returns are not the only metric of a good super fund. Other factors such as insurance, fees, payout offerings, member services, and investment choice are also essential considerations. 

Super funds incur investment fees (which includes advice, switching, activity, buy or sell spreads) and administration fees. In selecting a super fund, you need to be aware of the additional costs that can be charged by your super fund that will reduce the amount of money available to be invested. 

Growing Your Super Fund

There are multiple strategies to grow your super fund and achieve the ideal retirement benefits.

If you have been employed or are currently working, you can get the most out of your employer’s contributions by:
 

• Verifying the super guarantee contributions made by the employer into your super account
• Informing the ATO or APRA if the employer failed to pay your contributions
• Keeping track of your super account balance and searching for any lost or legally withheld contributions 

To actively grow your super fund: 
 

• Have a salary sacrifice agreement with your employer
• Give your super contributions
• Check whether you’re eligible for government contributions
• Transfer funds from foreign super accounts
• Add contributions from your spouse 

A way to grow your super fund is by making additional contributions, which can be above the amounts paid by your employer. There are, however, limits on the amounts you can contribute to your super balance every year. Once you’ve exceeded the caps, the ATO (Australian Taxation Office) may impose a corresponding tax rate. These limits include:
 

• Concessional contributions: These are contributions made into your super fund before-tax, with an annual cap of $27,500 for the 2023-24 tax year, increasing to $30,000 in the 2025 year. Your cap will be higher if the balance in your super fund at the end of the year prior to the contributions being made is less than $500,000 and you did not use the full amount of  your cap in prior years.(Note: Contributions above the non concessional cap, called Excess Non-Concessional Contributions, will be taxed at your marginal tax rate less a 15% tax offset for tax that has already been paid by the super fund. The amount, less the tax paid, will now be classed as non-concessional contributions)

 

• Non-concessional contributions: These are contributions made into your super fund after tax, with an annual cap of $110,000 for the 2023-24 tax year, increasing the $120,000 for the 2024-25 year, but with the ability to bring forward up to an additional two years of non-concessional contributions if you are under the age 75 on the 1st of July. If your total super balance is equal to or more than the general transfer balance cap ($1.9 million for the 2024 and 2025 years) at the end of the previous financial year, your non-concessional contributions cap is nil ($0) for the current financial year.

If your non-concessional contributions exceed the cap, you can choose one of two options. You can choose to have the Excess Non-Concessional Contributions (ENCC) plus 85% of the associated earnings released from the super fund. The ATO will then amend your assessment for the current year to include the associated earnings in your taxable income, and allow a 15% tax offset for the tax that would have been paid by the super fund on those earnings. If you choose to leave the ENCC in the super find, a tax of 47% is levied on the excess contributions. The ATO will issue a your super fund with a release authority to pay the ENCC tax. 

Why You Need a Financial Advisor 

A financial advisor can help you choose the best super fund, especially when you are confused, emotional, or uninformed about essential matters regarding wealth management.

In addition, a qualified advisor can guide you throughout the process, including the terms of use and disclaimer, to safeguard your future.


General Advice Warning
The above information may be regarded as general advice. It may not suit your personal objectives and your individual financial situation has not been taken into account when preparing this information. Accordingly, you should consider the appropriateness of any general advice provided as part of this information, having regard to your own objectives, financial situation and needs.