How Does Superannuation Work?

Superannuation in Australia plays a crucial role in securing your financial future. Whether you’re new to the workforce, an existing employee, a contractor, or self-employed, the superannuation system offers benefits, and each employment category has its criteria. With the flexibility to choose your preferred super fund, it’s important to understand how the system works and what you can do to make the most of it.

What is Super?

Australia has the third highest life expectancy in the world, and Australians are living longer. So if you are 65 years old today, you can expect to live up to your mid-eighties if you are a man and close to your nineties if you are a woman. 

Data source: Australian Bureau of Statistics (ABS) 

A majority of Australians also still depend on the tax-funded government age pension and need to save more for their retirement. Women, in particular, have much lower retirement income than men. With life expectancy on the rise, the government came up with the superannuation system to support Australia’s large aging population, in addition to the age pension.

Super is short for superannuation, the long-term savings plan made compulsory by the government to help give you a steady stream of income after retirement. The system requires employers to make superannuation contributions on behalf of their employees, and this money is invested in a nominated super fund.

The good news is more people nowadays are making super among their main sources of retirement funding. If you didn’t know much about superannuation before, then this is a great opportunity to learn more about how it works. Be among those making it an essential part of their retirement plan.

What Your Super Fund Does

When you become employed, regardless of your industry or your work type, your employer is required to make superannuation contributions on your behalf. This is called the superannuation guarantee (SG). 

The amount of money they contribute is typically a percentage of your salary based on the current super guarantee rate. This money goes to a superannuation fund of your choice to be invested. If you don’t choose, it will go to your employer’s nominated fund (your company’s own corporate super fund, for example). You can also make personal contributions to boost your super balance. 

The contributions that both you and your employer make are taxed at a lower rate than normal income. The government also provides tax concessions on the investment earnings of your super fund. These tax concessions should be beneficial to your super balance in the long term. 

Once the contributions are received by your super fund, the money is invested in accordance with your nominated investment profile. It’s wise to look into investing in a diversified investment portfolio, which includes shares, real estate, bonds, etc with a view to generating returns over the long term.

The risk of concentrated portfolios is higher than the risk of diversified portfolios. Even if one investment performs poorly, the performance of other assets may be excellent. As a result, the average is pulled up and the portfolio’s losses are reduced.

If your super is an accumulated benefit fund, then your eventual retirement payout would be calculated based on your fund’s total balance of contributions, investment returns, and fees paid. This makes your super susceptible to market conditions, but it has the potential for high returns. Increasingly, most super funds in Australia are on this benefit model.

If you are on a defined benefit fund, then the amount you receive in retirement is based on a formula that factors in your salary, age, years of service, and other considerations. You are given a guaranteed and pre-determined fixed amount, unlike if you are on an accumulation benefit. However, this type of fund can be potentially mismanaged and run out of money. 

Today, defined benefit funds are mostly offered by the public sector funds and may now be closed to new members.

Choosing a Super Fund

Where you put and grow your superannuation savings is a big decision that has a significant impact on your financial future. When you are employed, you would typically be automatically set up in your employer’s nominated super fund unless you opt out. 

Your current employer’s default super fund may not be the best vehicle for growing your super, however, so you may want to take a careful look at it and compare it with other super fund options.

When choosing a super fund, consider several factors, including:

• Fees: Compare the fees charged by different funds, including account management fees, insurance premiums, and investment costs. Consider the impact of these fees on your returns over time.
• Investment options: Review the investment options offered by each fund, such as shares, real estate property, and bonds, and decide which options align best with your personal investment goals and risk tolerance.
• Performance: Check each fund’s annual reports, financial statements, and other publicly available information to get a sense of their performance history. Review the past performance of each fund and make sure it has a good track record.
• Insurance: Consider whether you need insurance, such as life insurance or income protection, and compare the coverage and cost offered by different funds.
• Customer service: Consider the level of customer service offered by each fund, such as the availability of financial advice and the ease of making contributions and accessing your funds.
• Personal circumstances: When choosing a super fund, factor in your age, life plans, investment goals and time frame, tolerance for risk, and other personal considerations.

Here’s a quick overview of the types of super funds available to you:

• Retail Funds – These are offered by wealth management firms. They usually have a wide range of investment options and features. 
• Industry Funds – These are specifically designed for certain industries, such as construction or healthcare. They are often run as a not-for-profit by a board of directors with employer and employee representatives. 
• Corporate Funds – These are set up and managed by employers in the private sector to provide employees with a retirement savings plan and also to access tax benefits.
• Public Sector Funds – These are super funds for public sector employees, such as government agency workers or those in the armed forces. They often have a strong focus on providing stable and secure retirement outcomes.
• Self-Managed Super Funds (SMSFs) – These are private super funds that are managed by individuals or groups of individuals rather than by a financial institution. An SMSF gives you more control over your investment choices but also requires more effort and a higher level of expertise from you. 

Getting Your Super

Once you enter the Australian workforce, you are generally eligible for the super guarantee. Normally you would have to be 18 years old, but if you’re below this age, you could still qualify, provided that you work more than 30 hours per week. 

Whether you’re a full-time employee, a part-time employee or a casual worker in Australia, your employer would be required to contribute to your super fund regardless of how much you earn each month. After July 1, 2022, the $450 minimum earnings criteria was no longer applicable.

If you’re a contractor, you could still qualify for super contributions on certain conditions, primarily if you’re working as if you’re an employee. This means you are typically being paid for your personal labour and skills or the hours you work. 

If you’re self-employed, you’re not covered by the super guarantee, but it is highly recommended that you make super contributions for yourself. This requires more effort to set up but is beneficial to you in the long run. You could choose a retail or industry fund to manage your savings or set up your own SMSF.

If you’re a temporary resident, apart from being in the same super category as permanent resident employees, you can withdraw your super in the form of a departing Australia superannuation payment (DASP) once you leave the country. The DASP is taxed and can be claimed once you comply with certain requirements.

There are also some situations where you would not qualify to receive mandatory employer contributions, such if you engage in private or domestic work for less than the required hours per week and if you fall under certain categories of international workers.

Consolidating Your Super

Throughout your working life, you might change jobs, employment status, or personal circumstances, and as a result, you could register multiple super accounts.

These could become lost or unclaimed while still costing you money unnecessarily. You could be paying the same types of fees and charges multiplied by the number of super accounts you have, so it’s very important to do some regular housekeeping with your supers.

Consider consolidating your multiple super accounts into one fund (or a few manageable funds in some cases), however, the first step is to figure out how many super accounts you may have.

Here are some suggestions on how to find your super accounts:

• Check with your current employer. 

Does your employer have a super fund? If yes, most likely, you have been automatically set up in the fund. Then get information about the features and benefits of this fund. 

• Ask your previous employers.

If you’ve changed jobs in the past, you could send a request to your previous employers for any information about your super accounts with them.

• Find your lost or unclaimed super. 

A super is considered “lost” or “forgotten” if the Australian Taxation Office (ATO) cannot contact you and your account has not received any contributions for 12 months or if your account has been inactive in the last five years.

A super becomes “unclaimed” when the funds from these uncontactable accounts get transferred from super fund managers to the ATO for holding. 

You can use the ATO app and MyGov’s online services to search if you have any lost or unclaimed super accounts. Simply provide your personal details, and the tool will search for any super accounts linked to you.

Once you’ve gathered information on all your super accounts – past and present, you are ready to consolidate them. These are the next steps:

1. Compare your fund options. 

Research and compare different super funds to determine which one is best for you based on fees, performance, insurance options, and other factors. 

It is important to remember that if your previous super accounts have insurance cover attached, you may not be able to transfer this benefit to your new fund. Consider waiting to get a replacement or new insurance cover before consolidating your accounts, especially if you are actively using this insurance for your needs. 

2. Choose a new fund.

Once you’ve chosen the right super fund, apply to open a new account with them. You can skip this step if you already have an account open with this super fund.

3. Transfer your money. 

You can transfer your super from your existing funds to the new fund. This is usually a straightforward process that can be done with the ATO either online or by completing a transfer form. Note that this process may involve charges or deductions.

4. Close your old accounts.

After consolidating your super into one account, you can close any old superannuation accounts you no longer need. Your old super fund may not charge you an exit fee for closing your account, as the law prohibits it. If you chose to roll over the full balance of your account in Step 3, your account may close automatically.

5. Update your current employer. 

Give your employer the necessary details about your new consolidated super account, so they forward their contributions to it next time your SG contribution falls due.

Again, remember that consolidating your super may result in losing insurance coverage from your old accounts and incurring fees and deductions, so it is important to seek financial advice before closing any existing accounts. 

Make Smart Super Choices with Central Coast Financial Planning Group

Investing in your future is crucial, and superannuation is a smart way to ensure a comfortable retirement. With the right tools and resources, you can take control of your super and make it work for you. Choosing the right super fund, consolidating your super accounts to reduce fees, and selecting an investment portfolio that meets your needs are all steps in the right direction. 

Remember, financial literacy is key, and seeking the advice of a professional financial adviser for major decisions can never hurt. So, take the time to educate yourself on superannuation and make the most out of your retirement savings today.

Central Coast Financial Planning Group can help you with superannuation advice. Our team of financial experts will ensure that your money is invested in accordance with your needs and goals to help you secure your future, giving you peace of mind in retirement. Call us or book online to secure your complimentary first meeting with our advice team today!

DISCLAIMER: The views expressed in this publication are solely those of the author; they are not reflective or indicative of RI Advice Group’s position and are not to be attributed to RI Advice Group. They cannot be reproduced in any form without the express written consent of the author. This information (including taxation) is general in nature and does not consider your individual circumstances or needs. Do not act until you seek professional advice. Newcastle Financial Planning Group, Central Coast Financial Planning Group, Sydney Wealth Advisers, Coastal Advice Port Macquarie and Coastal Advice Ballina Byron are subsidiaries of Coastal Advice Group Pty Ltd which is a Corporate Authorised Representative of RI Advice Group Pty Ltd, ABN 23 001 774 125 AFSL 238429.