Superannuation
Troy Burns Updated Dec 19, 2022
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Unsure about what your superannuation is and how it works? At SMSF Mate we cover everything from the basics right up to the most advanced concepts you need to know about your superannuation.
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In a nutshell, superannuation is the primary way that most people save for their retirement. Payments are made to your super by your employer under the Super Guarantee (SG) scheme of 9.5% of your base salary, and you can also make contributions on your own to top it up.
There is also a co-contribution scheme and a low-income super contribution scheme put in place by the government to help low-income earners boost their super savings.
Once the cash is in the tin, so to speak, the funds in your super account are then invested in the market. You are given the option to choose how your funds are invested or if it’s all too hard, the super fund will decide for you.
The underlying objective here is that when you retire, you can access your superannuation and live off the money saved, rather than relying solely on welfare payments to support your lifestyle.
Super is a way of the government promoting self-sufficiency, and as such, tax incentives can often apply to super guarantee contributions and other contributions.
There are many rules and regulations with your super, so this article seeks to provide as much insight as possible about all of the ins and outs.
When the government first created superannuation, their motivation was to help people save to provide themselves with a better retirement income. People put money aside throughout their working lives and then draw down on the savings when they are no longer working.
Your employer pays superannuation into a super account of your choosing. Your employer is required to pay you at least 9.5% of your ordinary time earnings or base salary into this super fund. When we say ordinary time earnings, we are referring to ordinary working hour earnings, which does not include overtime, commissions and bonuses.
When it is all said and done, superannuation is as simple as saving a percentage of your income while you are working, investing it in the market and then drawing down on the balance when you are old enough.
Some extenuating circumstances permitting you can draw down on your super early, but otherwise, you have to wait until your retirement age.
It’s somewhat cut and dry; you are required to be paid super by law if you’re an Australian employee and you meet the minimum requirements.
Working as a casual, part-time, full-time or contractor, you are entitled to be paid super, and the same thing goes for even if you are not an Australian citizen.
Your super is only accessible once you reach a certain age, which is called the preservation age. It is essentially an age restriction which prevents you from accessing your super before retirement unless a condition of release is met and is largely based on when you were born.
Date of birth Preservation age
Before 1st July 1960 55
1st July 1960 – 30th June 1961 56
1st July 1961 – 30th June 1962 57
1st July 1962 – 30th June 1963 58
1st July 1963 – 30th June 1964 59
From 1 July 1964 60
There are a few exceptional circumstances that allow you to access your super early, which include:
We’ve written an article around the rules in accessing your super which you can check out here.
One thing that is commonly forgotten is that your super fund is really just a tax-effective entity or structure to hold your investments (usually, it’s a combination of shares, property, cash and fixed income products). If you were to hold these same investments outside of your super fund, the tax rate on the earnings would be very different and less attractive comparatively. By paying less tax, you are earning more within the super fund and experiencing a greater compound rate of return. We’ll give you an example, the money received in your super fund is taxed at 15%.
Also, let’s not forget that the earnings within your super fund are taxed at 15%, which when compared to your marginal tax rate (which can be as high as 45%), you can see how this is a tax-effective entity.
It is common for super funds to offer customers the various insurance options, including life insurance, income protection and total and permanent disability insurance. The cost of the insurance is very competitive within the super fund, and you do not have to pay for it out of your own pocket. Like anything, there are some pros and cons to having life insurance in your super which include things like:
It’s important to take the time to understand things to matter to you, especially the financial things. Unfortunately, awareness about super in Australia still has some room for improvement. Most Australian employees make no effort to understand how their retirement savings are invested. A common issue is when employees have multiple super funds from previous jobs. This is an issue because you are paying fees on each super account when you don’t need to. It’s very easy to consolidate your super into one super fund, and we have explained the simple steps in our how-to guide here.
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