What Is Super and How Does It Work?
If you’re looking to improve your future, it’s crucial to grasp the fundamentals of superannuation, commonly known as “super.” In Australia, superannuation plays a vital role in building a nest egg for retirement. Below we aim to demystify the concept of super and provide insights into its workings, answering questions such as “What is super?” and “How does super work?”
What Is Super?
Superannuation is a mandatory retirement savings system in Australia. It serves as a means for individuals to accumulate savings throughout their working lives, ensuring financial security during retirement. Employers are legally required to contribute a portion of an employee’s salary into a superannuation fund.
How Does Super Work?
Understanding the mechanics of superannuation is essential to make the most of this system. Here’s a breakdown of how it operates:
Super works through regular contributions made during your working years, which ultimately grow into a substantial retirement fund. There are two primary types of contributions:
- a) Employer Contributions: According to the superannuation guarantee, employers must contribute a minimum amount (11% as of July 2023) of an employee’s ordinary time earnings (up to a maximum limit) into their chosen superannuation fund. These contributions are separate from the employee’s salary.
- b) Voluntary Contributions: Individuals can make additional contributions to their super fund voluntarily. These contributions can be either pre-tax (concessional) or post-tax (non-concessional). Voluntary contributions offer tax advantages and help accelerate the growth of retirement savings. See our super contributions page for a break down of the different types of contributions.
Investment and Growth
Superannuation funds invest the contributions received into various assets, such as shares, bonds, property, and cash. The goal is to generate returns over time and increase the super balance. It’s important to be aware that superannuation investments carry both risks and rewards and that different investment options have different risk profiles. Generally speaking the higher the potential return the higher the risk or potential for loss. High Growth options are aiming for the highest return and carry the highest potential for loss in anyone year. Where as defensive options are primarily trying to preserve capital and only seek modest returns. It’s important to be invested according to your risk profile which will vary depending on your age, risk tolerance and financial goals.
Preservation and Access
Superannuation is intended to be a long-term savings vehicle for retirement. Generally, funds cannot be accessed until specific conditions, known as “conditions of release,” are met. These conditions include reaching the preservation age (which varies from 55 to 60, depending on birth year) and permanently retiring from the workforce. However, certain circumstances such as severe illness or financial hardship may allow for early access to super.
Tax Benefits of Superannuation
One of the significant advantages of superannuation is the tax benefits it offers. Contributions made through salary sacrifice or by self-employed individuals as concessional contributions are taxed at a lower rate of 15%, which is generally lower than most individuals’ marginal tax rates. Additionally, investment earnings within the superannuation fund are taxed at a maximum rate of 15%, which can be significantly lower than personal investment tax rates. These tax advantages can help individuals increase their retirement savings and potentially reduce their overall tax liability.
Individuals have the flexibility to choose their superannuation fund, whether it be a retail fund or an industry fund. It’s crucial to review factors such as fund performance, fees, investment options, and insurance coverage to make an informed decision. Regularly monitoring and adjusting your superannuation strategy based on changing circumstances is also advisable.
Take control of your super
Comprehending how super works and making informed decisions, can build a secure financial future. Understanding the basics of superannuation, including contributions, investment growth, access, and tax benefits empowers you to make the most of your super. Now it’s time to take action, see our guide on changing super funds, salary sacrificing and get in touch with us to get super advice.