What is superannuation?
Superannuation is the main way of saving for your retirement in Australia. Your superannuation is one big investment portfolio in your name that's managed for you by your super fund.
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Superannuation is likely to be your most-valuable financial asset when you retire. If you're not exactly sure what it is, don't worry, you're certainly not alone.
Finder data shows that 40% of Australians have little or no understanding of what superannuation is and how it works. Less than one-quarter of us say we understand it perfectly.
What is superannuation?
Your superannuation 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 without needing government assistance.
Superannuation is Australia's system for retirement savings, similar to America's 401(k) or the UK pension system.
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 10% of what you earn annually.
This means that your employer must pay at least 10% 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 $90,000. With a super guarantee rate of 10%, your employer would legally be required to pay you at least $9,000 into your super fund for the year. If the following year you got a pay rise and your salary increased to $97,000, your employer would then be required to pay you $9,700 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 $90,000 and your employer needs to pay you $9,000 in super for the year. This would be broken down into 4 payments of $2,250 instead of the one lump sum payment. Basically, the super guarantee rate of 10% would be applied to your quarterly earnings of $22,500.
There are a few situations where employees are not legally required to pay superannuation, including:
- If the employee is under 18 and works less than 30 hours per week
- If the employee is not an Australian resident and completes the work outside of Australia
Superannuation if you're 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.
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).
Your super benefits from compounded investment returns over your working life to help it grow. 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.
Video: What is superannuation?
Australian super funds
Why superannuation is so important
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. We won't all be able to access the aged pension, so you need to make sure your super is enough to retire.
How much superannuation will I have?
Because the super guarantee is paid as a percentage of your annual earnings, everyone will retire with different amounts of super. According to the ASFA, men are retiring with around $154,453 in super and women are retiring with around $122,848. This may seem like a lot, but it's far below the target for a comfortable retirement, which is set at $545,000.
A number of factors will impact how much super you have, including the following:
- The super fund you're with (some funds deliver much better investment returns than others, which it's why it's important to compare super funds)
- Whether you make extra contributions
- How much money you earn
- Whether you take extended time out of the workforce (for example to raise children)
- The industry you work in (some jobs, such as government jobs, pay employees a higher amount of super than what's required with the super guarantee)
- If you have multiple super funds (having multiple funds means you'll lose more money to fees, so you should consolidate funds to avoid this)
When can you access your 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 to get your super on track
Now that you've got a better understanding of what superannuation is and how it works, here's how to boost your balance.
- Compare. Compare super funds and look for one with low fees and high long-term returns (if you need some help with this, here are some of our best super fund picks).
- Consolidate. Check how many funds you have in your name (you can do this in your myGov account online). If you've got more than one, consolidate them.
- Contribute. Make sure your employer is paying you the right amount of super, and consider adding your own contributions to boost your balance even more.
- Check. You don't need to check your super every day, but it's a good idea to check at least once or twice a year to see how it's performing against other funds.
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