Fact checked
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.
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.
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.
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.
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.
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% |
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.
Compassionate grounds
Sometimes you may be permitted to access some of your super in exceptional circumstances, such as modifying a house for disability access (for you or a dependant), critical medical expenses or potential loss of a home. Be very wary of anyone offering to do so through a self-managed super fund, though, as that's highly illegal.
Severe financial hardship
If you're in a situation of extreme financial hardship (meaning you've been on government support payments for six months and you're not able to afford living expenses), you may be eligible to withdraw between $1000 and $10,000 from your super. This needs to be negotiated with your super fund (it's not administered by the ATO).
Terminal medical condition
If you're suffering from a condition which will likely be terminal within 24 months – and you can get paperwork from specialists to that effect – then you may be able to access your super. This will be tax free within that 24-month period.
Incapacity
If you have a physical or mental condition that renders you unable to work, you may be able to access your superannuation funds. For a temporary injury, this will generally only be in the form of an income payment as you recover. If the incapacity is permanent however (and medical professionals can certify that), you may be able to access your super on similar terms to if you had retired.
Buying your first home
In some circumstances, if you've previously made voluntary contributions to your super (perhaps through salary sacrifice), the government may allow you to withdraw those extra funds to help you buy a first home.
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.
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.
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.
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.
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.
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.
Quantum Savvy Pty Ltd (ABN 78 660 493 194) trades as Savvy and operates as an Authorised Credit Representative 541339 of Australian Credit Licence 414426 (AFAS Group Pty Ltd, ABN 12 134 138 686). We are one of Australia’s leading financial comparison sites and have been helping Australians make savvy decisions when it comes to their money for over a decade.
We’re partnered with lenders, insurers and other financial institutions who compensate us for business initiated through our website. We earn a commission each time a customer chooses or buys a product advertised on our site, which you can find out more about here, as well as in our credit guide for asset finance. It’s also crucial to read the terms and conditions, Product Disclosure Statement (PDS) or credit guide of our partners before signing up for your chosen product. However, the compensation we receive doesn’t impact the content written and published on our website, as our writing team exercises full editorial independence.
For more information about us and how we conduct our business, you can read our privacy policy and terms of use.
© Copyright 2024 Quantum Savvy Pty Ltd T/as Savvy. All Rights Reserved.
© Copyright 2024 Quantum Savvy Pty Ltd T/as Savvy. All Rights Reserved.
Quantum Savvy Pty Ltd (ABN 78 660 493 194) trades as Savvy and operates as an Authorised Credit Representative 541339 of Australian Credit Licence 414426 (AFAS Group Pty Ltd, ABN 12 134 138 686). We are one of Australia’s leading financial comparison sites and have been helping Australians make savvy decisions when it comes to their money for over a decade.
We’re partnered with lenders, insurers and other financial institutions who compensate us for business initiated through our website. We earn a commission each time a customer chooses or buys a product advertised on our site, which you can find out more about here, as well as in our credit guide for asset finance. It’s also crucial to read the terms and conditions, Product Disclosure Statement (PDS) or credit guide of our partners before signing up for your chosen product. However, the compensation we receive doesn’t impact the content written and published on our website, as our writing team exercises full editorial independence.
For more information about us and how we conduct our business, you can read our privacy policy and terms of use.
