Understanding Superannuation: A Comprehensive Guide

What is Superannuation?

Superannuation is a special type of account that you and your employer contribute to during your working years to support you during your retirement. Here’s how it works.

Definition of Superannuation

Often referred to as “pension” in other countries, Australia’s superannuation system is a retirement savings scheme that is meant to provide you with a regular income after you stop working. The main goal of super is to ensure you have accumulated savings to support yourself financially in retirement, reducing your dependence on the government Age Pension.

When your super contributions are invested within your super fund, they can grow over time, depending on the performance of the underlying investments. In the case of growth and continued super contributions , your retirement savings can potentially grow enough to leave you with a sizable nest egg once you decide retire.

Historical Context

Superannuation schemes have been around since the 1800s, but the modern system only emerged in the 1990s. The 1992 Superannuation Guarantee (Administration) Act was the landmark act, mandating employer contributions for most employees.

In 1997, the Superannuation Industry (Supervision) Act 1993 established a regulatory framework to protect members’ interests. The 2000s saw key reforms like the Superannuation Choice of Fund legislation, allowing employees to choose their super fund, and the Simpler Super reforms, which made super easier to understand and access, including tax-free benefits for over 60s.

In 2012, the MySuper legislation introduced low-cost, simple super products for better default options. The 2013 SuperStream reforms improved system efficiency through better data and payment standards.

How Superannuation Works

The Basics

As a salaried employee, your employer generally must pay a percentage of your earnings (currently 11.5%) into your super  if you are over 18 years old. For those under 18 years old, you must work more than 30 hours in the week to be entitled to receive compulsory super contributions. Your super fund generally invests this money to help grow your super savings for retirement.

You can also choose to make additional voluntary contributions to your super account to help grow your super savings.

Types of Contributions

There are a number of different types of super contributions that can be paid into a super fund, including:

• Concessional Contributions: These types of super contributions come from your pre-tax income and are generally taxed at 15% when they’re received by your superannuation fund.
• Non-Concessional Contributions: Paid from your after-tax income, these contributions have generally already been taxed, so they may no longer be subject to tax when received by your super fund.¹
• Government Contributions: These are contributions coming from the government, generally as a subsidy. For example, under the Low Income Superannuation Tax Offset (LISTO), the government could make additional contributions to your superannuation of up to $500 for eligible low-income earners who make personal after-tax contributions.¹

More information on contribution types can be found on the ATO website or from a registered accountant. Do note that contributions may be subject to contribution limits.

Choosing and Managing Your Super Fund

Types of Super Funds

Your super contributions can generally go into either a MySuper account or a choice super account.

• MySuper: Many super funds offer a MySuper product, which is generally a simple, low-fee option. This is usually the default option that employers would choose for you.
• Choice: Super funds can also offer other types of investment options such as pre-mixed investment options that might be invested into shares, bonds and property. These investment options are classified as “choice” super products – you actively decide to invest your super into these options rather than going with the default MySuper option.

For your reference, you can take a look at Superhero Super’s MySuper product and Superhero’s Super’s Choice investment options. Please note that Superhero Super’s MySuper product is only accessible through employer arrangements.

Categories of Super Funds 

• Retail funds: Tend to be run by financial institutions like banks or investment companies. They’re open to the general public, offering various investment choices, such as pre-mixed and tailored portfolios.
• Industry funds: Originally established for specific employees in specific industries but now often open to the public.
• Public sector funds: Primarily for federal and state government employees, usually restricted to public sector workers. 
• Corporate funds: Set up by companies for their employees, typically restricted to employees of the sponsoring company. These funds often offer tailored benefits and fees negotiated by the employer.
• Self-managed super funds (SMSFs): Allow individuals to manage their own super investments with full control over investment decisions, including a broader range of assets, but require adherence to strict regulatory and administrative requirements.

Investment Options

Just as there are several super funds to choose from, you can also select how your retirement funds are invested. To choose the right investment option for you, some factors to think about include:

• Your age,
• Your risk tolerance, and
• How long you have before you access your funds.

Here’s a quick look at some of the diversified investment options that super funds usually offer:

• High growth: High growth investment options generally focus on maximum exposure to assets with higher growth potential, like international and domestic shares. While these options can pose a higher risk due to the volatility in the underlying assets, they may result in higher returns than more conservative options. They’re typically used by younger members with a higher risk tolerance and a long-term investment horizon.
• Growth: Growth investment options generally aim to provide higher than average capital growth over the long term by allocating a larger portion of funds to assets like shares, property and infrastructure. They typically offer a balance between higher returns and manageable volatility. They are often chosen by members seeking substantial growth who are comfortable with some level of risk but prefer less exposure than high-growth options.
• Balanced: This option generally focuses on a mix of growth and defensive assets to balance the risk and return. Balanced investments usually comprise a combination of investments such as shares, bonds, property and cash. This approach may be most suitable for members with a medium to long-term investment horizon who are after balanced growth and have lower risk tolerance to high growth investments.
• Conservative: Conservative strategies are generally targeted towards members approaching retirement or with a low risk tolerance. They primarily focus on defensive assets with lower volatility, like bonds and cash, with a smaller proportion invested in growth assets.
• Cash: Cash investment options focus on preserving capital by investing solely in cash or cash-like assets like term deposits and money market securities. These options carry lower risk and provide steady, predictable returns, making them ideal for members seeking short-term stability, immediate liquidity or those with a low risk tolerance. 

For more information on investment options, refer to the funds’ Product Disclosure Statement (PDS) documents or MoneySmart’s website.

Switching Super Funds

Before switching to a different super fund, it’s worth spending a bit of time comparing funds. When it comes to comparing super funds, it helps to take a range of different factors into account, including:

• Their performance (remember past performance is not always an indicator of future performance),
• Fees,
• Insurance cover,
• Investment options, and
• Services.

To help you compare super funds, the Australian Government has created their very own YourSuper comparison tool. It allows you to compare super funds based on their fees and performance. You can even see how your current super fund stacks up against the competition in your myGov account.

Be sure to also review the PDS and other relevant disclosure documents for each super product before settling on a super fund.

Consider the effect that switching superannuation funds may have on your insurance and other related benefits. It is important to thoroughly review and understand the potential impact on your insurance coverage, fees, investment options, and other benefits before making any changes.

Don’t forget to check out Superhero Super

Superhero Super is an award-winning super fund² with lower fees and costs than 75% of other super funds³, without sacrificing flexibility and performance. Our admin fees and costs are 0.35% of assets per annum plus $1 per week ($52 per year)⁴.

Superhero Super offers its members access to several superannuation investment options, ranging from professionally-managed diversified investment options to individual selected shares and ETFs.⁵ Your Superhero Super account will also sit next to your Superhero Trading account on our app, allowing you access to manage your super anytime.

You can read more about Superhero Super in our Product Disclosure Statement and our other disclosure documents.

Maximising Your Superannuation

Making Additional Contributions

You can choose to make extra payments to your super to help grow your savings. Some ways to contribute to your super include:

• • Salary sacrificing: You may be able to set up a salary sacrifice arrangement with your employer where you can choose to pay a portion of your pre-tax salary into your super, on top of the compulsory employer contributions. By salary sacrificing, you may be able to take advantage of the concessional tax rate of 15% on contributions, up to the concessional contributions cap.
  • Personal after-tax contributions (deductible): Other than salary sacrificing through an agreement with your employer, you may also contribute to your super with your after-tax income. A portion of these contributions may be claimed as a tax deduction, up to the concessional contributions cap.¹
  • Voluntary after-tax contributions (non-deductible): These are after-tax contributions you can make to grow your super, but don’t claim as tax deductions. You can make as much as you want, up to the non-concessional contributions cap.

Learn more from the ATO website.

Superannuation and Taxation

Concessional contributions, including employer contributions and salary sacrifice contributions, are taxed at 15% within the super fund. This tax rate is less than most individuals’ marginal tax rates, which can be an encouraging reason for some individuals to voluntarily contribute to their super if their Super Guarantee contributions fall below the cap. The concessional contributions cap is currently $30,000 p.a.

Non-concessional contributions are made from after-tax income and are no longer additionally taxed by your super fund. The non-concessional contributions cap is currently $120,000 p.a. 

If you go over either of these contribution caps, you may be subject to additional taxes.

More information on contribution caps can be found on the ATO website or from a registered accountant or licensed financial advisor. 

Retirement Planning

By understanding how much you’ll need to fund your retirement, you can work toward growing your super while you’re still working. For general information on retirement spending, you can use Super Consumers Australia’s Retirement Savings Targets and the Association of Superannuation Funds of Australia’s (ASFA) Retirement Standard to estimate how much you’ll need for retirement.

Once you have an idea of how much you’ll need to retire, you can use Moneysmart’s Superannuation Calculator to work out how much super you’ll have once you retire and how fees will affect your final super balance.

Accessing Your Super

Conditions of Release

You can access your super when you turn 60 and decide to retire, or when you hit 65, even if you’re still working.

With that said, there are special circumstances where you may be able to access your superannuation early, like severe financial hardship, permanent or temporary incapacity or on compassionate grounds.¹

Withdrawal Options

When it comes to withdrawing your super, you may choose to receive it in lump sum withdrawals, as an income stream or as a combination of both. The tax implications of each withdrawal option depend on your age, the type of super fund and the nature of the withdrawal.

For example, if you’re 65, your super income is generally tax-free regardless of whether you access a lump sum payment or income stream. However, there are different tax implications depending on your age and withdrawal option, so it’s worth familiarising yourself with super tax and even consulting with a registered accountant or financial adviser before you tap into your super savings.

Regulatory Framework and Protections

Role of Government Bodies

The Australian Taxation Office (ATO), Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC) play crucial roles in the regulation and oversight of the superannuation system in Australia.

While the ATO focuses on tax administration, compliance and regulation of SMSFs, APRA oversees the regulation of larger superannuation funds.  ASIC complements these efforts by enforcing consumer protection laws and regulating the financial services conduct of superannuation providers. Together, they safeguard the integrity, stability and functioning of the superannuation system, protecting the retirement savings of Australians.

Consumer Protections

Superannuation members in Australia have various rights designed to protect their interests and ensure transparency, fairness and accessibility within the superannuation system. These rights include the right to information, the right to choose and change funds and the right to make contributions, to name a few.

In addition, several mechanisms are designed to aid in resolving disputes. Superannuation funds are required to have an Internal Dispute Resolution (IDR) process to handle complaints from members. If a member is not satisfied with the outcome of the IDR process, they can escalate their complaint to the Australian Financial Complaints Authority (AFCA) previously the Superannuation Complaints Tribunal (SCT), an independent external dispute resolution body.

Common Myths and Misconceptions

Debunking Myths

Superannuation can get pretty complex at times, so it can be easy to mix things up. We’re here to debunk a few common misconceptions about super.

Misconception: Superannuation is just a savings account

Reality: Your super is a complex scheme designed to grow retirement savings over time using various investment options, generally including shares, bonds, property and cash. Super funds often provide different investment options so you may be able to tailor your super to suit your risk tolerances and retirement goals.

Misconception: I can’t access my super until I’m 65

Reality: You can generally start accessing your super once you turn 60 years old. However, accessing super before this age may be possible under certain conditions, like severe financial hardship or permanent incapacity.¹ Do note that additional taxes may be applied.

Misconception: I don’t need to worry about super until I’m older

Reality: The earlier you start contributing to your superannuation, the more you may be able to take advantage of compound interest and potential investment growth. Depending on your individual circumstances, you may be able to benefit from making voluntary contributions. 

Future of Superannuation

Upcoming Changes and Reforms

There are several changes on the horizon for super. As of 18 October 2024, some have been legislated while others are proposed changes. You can keep track of their progress on the ATO’s website. 

• The introduction of super on Government-funded Paid Parental Leave (PPL) for parents of babies born or adopted on or after 1 July 2025,
• Increase to the super guarantee to 12% in 2025,
• From 1 July 2026 employers will be required to make super contributions each payday, and
• Super balances over $3 million will be charged an extra 15% on investment earnings from 1 July 2025. This is on top of the 15% already in place.

These are just some changes and reforms being introduced to achieve better outcomes for members.

Conclusion

Recap of Key Points

Your super savings are key to a comfortable retirement. With this in mind, it’s important to stay on top of your super while you’re still working so you can maximise them.

As always, the above information is not meant to be taken as personal advice and it’s important to obtain professional advice from a tax specialist or registered accountant before making any changes to your super. 

 

¹Eligibility Criteria or rules apply. Learn more on the ATO’s website or with a registered accountant or financial adviser.

²Awarded – Winner: Excellent Rates and Fees, Winner: Best for Direct Investments in the WeMoney Superannuation Awards 2024. Awards and ratings are only one thing to consider when deciding if Superhero Super is right for you. Read the PDS and TMD for more information.

³SuperRatings undertook a fee analysis of Superhero Super’s Growth and MySuper Growth investment options against a broad range of other superannuation funds tracked by and derived from SuperRatings median data for the relevant 60%-76% growth asset allocation range. The SuperRatings data used the latest available information as at 31 March 2024. The comparison was based on the total fees and costs of Superhero Super Growth and Superhero MySuper Growth, assuming a $5k, $50k, $100k and $250k account balance effective from 15 May 2024. Superhero Growth was in the top quartile for low fees and costs across all account balances used in the comparison. Superhero Growth fees and costs were 28% lower compared to the median fund for a 50k balance. Refer to the Superhero Super PDS and TMD for more information on investment options.

⁴Holding limits and different fees apply to investments held by members in Superhero Super. Read the PDS for more information.

⁵Additional fees and costs for Direct Investments apply. Refer to fees and costs table available in the relevant PDS, AIG and Direct investment Guide.

This article reflects information accurate as of 4 October 2024. For latest information or calculations, including eligibility criteria, refer to the ATO website or consult with a registered accountant. 

This information has been prepared by Superhero Super Pty Ltd (ABN 40 667 649 854), a Corporate Authorised Representative (CAR 1306018) of Superhero Securities Limited (ABN 96 160 456 315) (AFSL 430150), and the Promoter of Superhero Super, a sub-plan of OneSuper (ABN 43 905 581 638), issued by Diversa Trustees Limited (ABN 49 006 421 638, AFSL 235153) as Trustee of OneSuper. 

Before making a decision on Superhero Super, please read the relevant Product Disclosure Statements (PDS) and Target Market Determinations, found at superhero.com.au/support/documents. 

Superhero does not provide financial advice that considers your personal objectives, financial situation or particular needs. All investments carry risk so please consider carefully before investing. Past performance is not indicative of future performance. Graphics, charts and graphs provided for illustrative purposes only.