The Ultimate Beginner’s Guide To Superannuation

What Is Superannuation?

Super, or “superannuation”, is something that touches almost all Australians. It’s an automated way to save for your retirement.

Super is one of the three pillars of retirement income in Australia, with the other two being the age pension and income that you have from other personal savings accounts.

The idea is that you put money into your super fund account while you work. It keeps accumulating over time, and while it is in your super fund, it is invested on your behalf, and it gains investment returns.

This has a so-called “compound interest” – the returns you get are reinvested, so it grows your super even further. It is essentially a snowball effect so that by the time you retire, you hopefully have a very nice balance in your super account.

How Does Superannuation Work?

Once you work as either a casual or permanent employee, and you earn over $450 in a calendar month, you are entitled to super contributions made by your employer. These contributions are called the “super guarantee“.

Currently, it is at 9.5% and based on your before-tax income. This 9.5% of your income is paid into your super account, and the good thing is that this money is only taxed at 15% instead of your marginal tax rate – your personal tax rate that may be quite higher than this.

Furthermore, if you are a low-income earner – your annual income is below $37,000 (as of July 2019) – you will be automatically reimbursed up to $500 for the tax you paid.

How To Calculate The Super Guarantee

To best answer this question, let’s look at an example. Let’s assume that you earn $82,000 before tax per year. That’s the annual average rounded income of an Australian.

The super guarantee is 9.5%, or in other words, that’s $7,790. This amount is paid into your super account on top of your salary.

Is the super guarantee stable? As a matter of fact, it’s not. It was supposed to increase to 10% in July 2015, but this did not occur, and the government decided to slow down the increase.

It is now supposed to increase to 10% by the 1st of July 2021, and continuously increase to 12% by July 2025. This is just what is planned currently.

Can I Choose My Super Fund?

Yes, most people can choose the super fund they want to go with. To be sure, we recommend checking with your employer if you can choose yours.

If you are eligible to choose, or if you would like to switch, you can complete the Superannuation Standard Choice Form which you can download from the ATO, or maybe even your employer can provide you with one to organise this.

How To Choose A Good Super Fund

This is a tricky question and one that is not easily answered. It is difficult to find a good fund because there are so many, and everyone claims to be the best.

According to the government website MoneySmart, there are six features you should consider when choosing a super fund, as seen below.

There are also comparison sites that allow you to compare the funds. We highly suggest looking at them to get a better understanding of each fund and to confirm which is the best for you.

Here is a list of some great comparison sites:

• Canstar Cannex
• Rate City
• Chant West
• Morningstar
• Selecting Super
• Super Ratings

Once you narrow down some funds that you are interested in, look at the product disclosure statements. This allows you to look at all the details and compare the funds.

If you still have further questions, then give them a call and get all of your questions answered.

Insurances Through Superannuation

Most super funds come with insurance for death, disability and income protection. You may be asked to cover these three things through super when you join the fund. If you don’t want to be covered, you will have to let your fund know and discuss it with them.

The bonus is that insurance through your super fund is likely to be cheaper than if you were to get it independently, but on the other hand, it is something else you have to look into when choosing a fund.

What Happens To The Money In A Super Fund

As we mentioned previously, your money is invested. Most funds offer several options that you can choose from, but if you don’t choose, your money is usually invested in the balanced option.

This is a medium risk investment option that allows you to grow your money by investing in a mix of different asset classes and single sector options such as cash, property, and shares.

Depending on where you stay in your life, you may want to choose a different investment option – a more aggressive one if you want to grow your money more, but also have time left to compensate for potential losses.

Or perhaps a more conservative one (lower risk) if you already have a nice sum in your account and you want to preserve it. That’s an important thing to keep in mind with investments – there is always the chance of negative returns or losses. 

This is a short summary – you can find further information from MoneySmart

It all depends on market fluctuations. Therefore, it may be a good idea to talk to a financial advisor to determine which is the best investment strategy for you.

Some super funds offer this service to their members on how to best invest your money in the super fund or even to figure out which fund is the one most suitable for you.

How To Boost Your Super

If you would like to grow your super more than with just your employer contributions, you can make personal contributions. There are four ways you can do this.

1. Salary Sacrifice

 A certain amount that you define is deducted from your pre-tax salary by your employer and sent in addition to your employer contributions into your super account.

2. Personal After-Tax Contributions

These are the contributions you make from your income after tax. You can set this up as an automated payment through your employer (similar to salary sacrificing), or you can send it through via bank transfer from your account to your super fund.

3. Bank Transfer

 This is essentially the same as the previous method where you transfer it from your bank account into the super account, but in this case, you would transfer a larger sum from your savings (one-off), not a regular transfer deducted from your salary.

4. Super Transfer

The idea here is that you consolidate your multiple super fund accounts into just one main account.

There are also Government Contributions which can assist you with growing your super if you are a low-income earner.

If your annual income is under $37,697, the government contributes up to $500 if you make a $1000 contribution from your taxed income.

If your income is between this limit of $37,697 and $52,697, your maximum entitlement decreases progressively as your income increases.

More Tips To Make The Best Out Of Your Super

• If you have multiple accounts, you should consolidate them into just one. This allows you to save costs by paying only one set of fees, it reduces your paperwork, and it enables you to keep better track of your super. But before you proceed and move all of them into one fund with the highest balance you need to check that it is the best one for you. Check the fees, performance, and look into the insurance you may have through the fund.
• Fees can have an enormous impact on your super. It is a good idea to choose a fund with low fees, which we made a video on. Have a watch and let us know what you think!
• If you would like to more tips on how to boost your super, we suggest taking a look at this video/article we made for that topic.

When and How Can I Access My Super?

When you can access your super depends on your age. We recommend watching our other video where you can learn everything you need to know about when you can access your super!

In short, you can access your super once you reach “preservation age“. You can take a look at the table below, which shows your preservation age according to your birth date.

There are three options on how you can access your super.

1. You can take out a lump sum
2. You can move your money into an account-based pension account within your super which allows you to take a regular income from your super;
3. Or you can make a combination of both.

Again, the video we mentioned on this point goes over this information in further detail.

Superannuation Contribution Caps

There are caps in place that you need to be aware of. The concessional contribution cap (ie., taxed at 15%)  $25,000 a year into your super fund, unless you are entitled to make carry-forward contributions. This includes both personal and employer contributions.

Additionally, you can only have a total amount of $1.6 million in your super fund.

These are the fundamentals of Superannuation you need to know. Did you have any further questions about superannuation? We encourage you to post them in the comment section below.

Check back on our YouTube Channel or Retire On website regularly to keep updated on new retirement planning strategies, tips, and other useful information.