Understanding super

A superannuation guarantee is legally required for employers in Australia. During your career, a portion of your paycheck will be put into a fund that you cannot touch until you turn 65, unless you encounter an emergency. If you are wondering why superannuation is important, here is a brief history of superannuation as well as a comprehensive guide to help you get the most out of your super.

What is superannuation?

Before we can talk about why super is important, we should cover what it is and how it came about.

A brief history

Australia began implementing legislation to help workers achieve retirement income in 1900 when New South Wales introduced the age pension. This guaranteed a weekly payment — 10 shillings for single people and 15 shillings for couples — for residents who were above the age of 60, had been living in New South Wales for at least 15 years, and whose incomes were not above $50 per year. The rest of the country followed suit shortly after.

Due to shorter life expectancies back then ― 55 years for men and 59 for women — most people never even saw their pension. The law required many alterations over the years due to the complex nature of providing retirement funding for a diverse population. In 1991, the modern superannuation guarantee was born.

Super guarantee

The superannuation guarantee requires that employers contribute to the super of their staff members. Currently, they must contribute 11% of an employee’s salary into the fund, and the percentage will continue to increase.

Employer contributions are a starting point for workers to build their super. While some people will rely on their super guarantee alone, many opt for making additional contributions to their super. This is a wise decision because, due to compounding interest, the more money a person adds to their super, the more it grows.

Additional contribution options

Many Australians choose to add to their super by salary sacrificing, which is when they make an agreement with their employer to direct an additional percentage of their salary into their super on top of the super guarantee. This is a pre-tax contribution, which means that instead of the contribution being taxed at the employee’s marginal rate, it enters a super fund untaxed, and then is taxed at a maximum rate of 15%.

Employees can also benefit from personal contributions, which is when they add money that they have already earned into their super. This money has already been taxed, however, if the employee’s marginal tax rate is lower than the rate at which their super is taxed, they could save money. Alternatively, workers can often claim their personal super contributions as a tax deduction.

There are also ways for lower income earners to receive help building their super, and that is with government co-contributions. This is when the government contributes up to 50 cents for every dollar a person adds to their super, with a cap of $500 per year. This is only an option for lower income earners, and it gives them a chance to build their super without sacrificing as much.

How to choose a superannuation fund

Most employees have the opportunity to choose their own super fund. There are a lot of options out there, so it’s important to research them all and make an informed decision.

For now, here’s a brief overview of the different types of superannuation fund.

Retail fund

For a wider range of investment options, workers can opt for a retail fund, which is generally run by banks or investment companies. They can be low, medium, or high cost, providing a significant level of customisation. The catch is that the owner of the fund typically keeps some of the profit.

Industry fund

For employees who want to tailor their super fund to the industry in which they work, an industry fund is a viable option. While today, this type of fund is not always exclusively industry-specific, many of the smaller funds remain so. These funds are not-for-profit and do not have shareholders.

Public sector fund

This is an option exclusively available to government employees. The fees are typically low, profits are put directly back into the fund and some employers contribute more than the super guarantee. However, the investment choices are not as wide-ranging or diverse as some other funds.

Corporate fund

Arranged by an employer, corporate funds are wide-ranging, and the costs and the amount of options generally depend on the size of the company. Larger employers may have more options and low to medium costs, whereas small employers may have high costs and not as much capacity for a wide array of options.

Self-managed super fund (SMSF)

SMSFs are private super funds that the worker manages themselves. This gives the employee the freedom to choose all of their own investment options and it eliminates many fees. However, SMSFs come with risks. When someone manages their own super fund, they are fully responsible for all of the fund’s decisions as well as the consequences that come with them. Managing a super fund is also time-consuming.

Why superannuation is important

Regardless of what type of super fund you choose, it’s designed to help you achieve the retirement you want.

Making additional contributions can help Australians retire more comfortably. There are many ways to grow your super, and Active Super can help you discover which strategies are best for your lifestyle and your goals.