What is Superannuation?
Superannuation is the system used in Australia to save for retirement; contributions are made during a person’s working life, and accumulate over time to provide a fund that will finance their retirement years. The system consists of the compulsory payments required of employers, government contributions in some circumstances and also personal contributions from those who want to top up their fund.
The Superannuation Guarantee represents the compulsory system of superannuation support for Australian employees, paid for by employers, which was introduced in 1992.
Employers pay a percentage of the ordinary time earnings of their employees (including part-time and casual employees) who are aged over 18, and who are paid $450 (before tax) in a month, into a complying superannuation fund or retirement savings account.
How is superannuation managed?
Superannuation is paid into a superannuation fund. There are a number of types of fund, which vary greatly in complexity and risk profile; these funds are heavily regulated.You are free to choose into which type of account you invest your superannuation payments; equally, you are under no obligation to research and choose a fund yourself, and can simply let your employer pay into a fund of their choosing.
The superannuation fund chosen by the employer must be a MySuper account, a simple, low-cost fund which is easy to understand; these accounts were introduced in July 2013, when it was recognised that approximately 83% of people don’t actively choose their fund, and prefer to leave that choice to their employer. The exception to the rule is existing accounts, which have until July 2017 to become MySuper compliant.
How to contribute
Contributions can be concessional (pre-tax) or non-concessional (post-tax). Concessional payments include employer contributions and salary sacrifice payments; they are called concessional as payments made up to the cap of $30,000 ($35,000 if you are over 49)are taxed at a concessional rate of 15%. Non concessional payments are effectively personal contributions from taxed income, and are also subject to a cap, albeit much higher than that for concessional contributions. Contributions in excess of cap are subject to additional tax and, in the case of excessive concessional contributions, also an interest charge.
You can be as active in your superannuation as you wish; you can either let your employer make the compulsory payments into their chosen fund, or you can fully engage by choosing a fund yourself, making salary sacrifice and additional payments, and monitoring your account to ensure that you get the best returns on your investment. There are also options between the two extremes, which include pre-tax salary sacrifice payments, and payments made from post-tax earnings.
Superannuation is how you invest in your future by saving for your retirement; you will pay into your fund during your working life, and when you reach retirement age, your fund should be sufficient to provide you with adequate income during your retirement years. Your decisions during your working life will have a big impact on your financial wellbeing during retirement, and are best taken after taken independent financial advice.