Superannuation in Australia: Short Overview

Australia’s retirement savings system is among the top-ranked globally. Whether you are a part-time or full-time employee, the system ensures you have a steady income at retirement. The funds are available to you when at your preservation age, between 55 and 60, or when you turn 65. If born after 1960, you access your super between 55 and 60 years. But those born earlier access it at 55.

As an Australian, you control the superannuation – you choose the fund and the type of investment you’d like. Some choose to invest their retirement savings in an ethical fund with strong ESG credentials. Others opt for long-term returns, thus going for a large industry fund like AustralianSuper.

What is Superannuation?

Superannuation is a compulsory savings system in Australia. As an employee, you invest a fraction of your earnings in super funds in Australia as a retirement plan.

The system reduces retirees’ dependence on pensions. Superannuation accounts grow over time through compounding—both regular contributions and earnings compound, leading to significant growth in the investment. In the end, contributors have sufficient savings to maintain their lifestyle in retirement.

Superannuation grows over time, experiencing temporary declines during economic uncertainty or recessions. For example, research from Lonsec shows that the median balanced growth option had a 4.8% return in 2022. Since 2000, this was only the fourth year when balances declined, reflecting broader global market instability. Superannuation has shown long-term solid performance. It has averaged a 6.1% return since 2000.

From an investment analyst’s point of view, if you are a young employee, go for high-growth products. These investments have time to ride out economic cycles, so you don’t have to worry about the risks. But older employees don’t have the luxury of time. They are approaching retirement. So, they are more cautious and tend to love balance. In this case, cash or bonds offer them the best alternative.

Types of Superannuation Funds

A key feature of this retirement system is its flexibility. Australians choose both the fund and the type of investment they like. But the choice significantly impacts the growth of retirement savings. So, selecting a fund that aligns with personal financial goals and risk tolerance is crucial. These options include:

Industry Funds

Industry funds are profit-for-member funds. Initially, they served specific industries, such as healthcare, construction, and education. Over time, many of these funds have opened their doors to all workers. Examples include UniSuper, AustralianSuper, and Hostplus.

Members are its shareholders, so they typically enjoy all the profits and benefits, including lower fees.

Retail Funds

These are funds run and managed by financial institutions like banks and investment companies. They are available to the public and often offer a wide range of investment options.

Technically, the laws prohibit them from operating for profit. But, these funds may outsource some profit-making components. They may also include approved product lists from financial advisers. Of course, these come at a fee for their advice. So, be careful with the fees; they can eat into your returns.

Public Sector Funds

As the name suggests, Public Sector Funds are meant for employees in the public service sector. Membership may be restricted, but some accept even non-government workers. A good example here is the Australian Retirement Trust super savings retirement scheme.

While public sector funds have limited investment options, they often offer competitive benefits. Employers contribute more than the standard superannuation guarantee, a massive plus for employees.

Corporate Funds

Companies establish retirement funds for their employees. They can manage the fund in-house or outsource it to larger superannuation providers.

Corporate funds offer tailored investments and lower fees. Unfortunately, they limit membership to the employees of the sponsoring company.

Self-Managed Super Funds (SMSFs)

An SMSF is a trust where up to four individuals hold and manage funds or assets to provide retirement benefits. All members of an SMSF must also be trustees or directors of the fund’s corporate trustee.

SMSFs offer you complete control over your superannuation investments. Members are responsible for complying with superannuation regulations. But SMSFs need significant time and expertise to manage effectively. Running it can also be expensive, so it’s generally best for individuals with large super balances (over $200,000).

MySuper Products

MySuper products are simple, low-cost superannuation options introduced by the Labor Government’s Stronger Super reforms in 2013.

MySuper is often the default option for workers who do not choose a specific super fund in Australia. It is best for you if you don’t like making investment decisions. MySuper funds typically integrate a balanced mix of growth and defensive assets.

Superannuation Contributions

These contributions are primarily through the Superannuation Guarantee (SG) in Australia. SG mandates that employers contribute a percentage of an employee’s earnings into their super funds in Australia. As of 1 July 2024, the lowest SG rate is 11.5% of the employee’s ordinary time earnings (OTE) and will increase to 12% by July 2025. Employers are required to make these contributions at least quarterly.

Employees can also make personal contributions to their superannuation accounts, which can be concessional or non-concessional.

Concessional Contributions

Concessional contributions are personal contributions you add directly to your super fund but claim a tax deduction. They attract a 15% tax in the fund.

You make these contributions from pre-tax income. But you can only contribute up to $27,500 per year.

The following fall under concessional contributions:

• Employer contributions.
• Salary sacrifice contributions.
• Voluntary contributions made from before-tax income.

These contributions are an effective way to reduce taxable income while boosting super savings.

Non-Concessional Contributions

You don’t claim a deduction if you contribute from your net income. SG considers them non-concessional, i.e., made from after-tax income and are not taxed further within the super fund.

As of 1 July 2024, the annual non-concessional contributions cap is $120,000. But the limit is subject to review annually to correspond to the average weekly ordinary time earnings (AWOTE).

With non-concessional contributions, you save more without exceeding the concessional contributions cap. What’s more, use the bring-forward rule if you’re under 75 and eligible to contribute up to three times the annual cap in one year. Be careful with the rules, though; you may have to pay extra tax if you break the caps.

Superannuation and Retirement

Superannuation is critical to retirement planning in Australia. The money saved during working years helps maintain a lifestyle after retirement. Australians can access their super once at their preservation age, depending on their birth year.

Upon reaching preservation age and retiring, you can:

1. Withdraw a Lump Sum: A vast payout is good for settling debts, big purchases, or investments. But, withdrawing a large amount at once can deplete retirement savings quickly.
2. Set Up an Income Stream: You can have regular payments from the super fund, which offers a steady income. Payments can be adjusted based on financial needs.
3. Use a Combination: Many retirees combine lumpsum payouts and regular payments. The lump sum can help offset a considerable payment, while the regular payments guarantee a steady flow of income in retirement.

Taxation of Superannuation

Superannuation enjoys favourable tax treatment in Australia, making it an attractive option. The tax on superannuation varies depending on timing, contribution or withdrawal, and fund earnings.

Here are some notable tax treatments:

• Contributions from pre-tax income attract a 15% tax within the super fund. High-income earners (over $250,000 annually) pay an extra 15% tax on these contributions, known as Division 293 tax.
• Contributions from after-tax income are non-taxable in the super fund. But they must observe the annual contribution caps.
• Investment earnings generated by a superannuation fund are taxable at a concessional rate of 15%. This tax rate applies to both income and capital gains. But, the rate comes down to 10% if the assets you hold the assets in the fund for more than 12 months.
• Withdrawals from superannuation are usually tax-free for individuals aged 60 or older. If you’re between your preservation age and 60, some tax may apply depending on the components of your superannuation benefit.

Recent Changes and Trends

The Australian superannuation system is continuously evolving, with recent changes and trends aimed at improving retirement outcomes for Australians. Some recognised changes and trends include:

1. Increase in Superannuation Guarantee. The Superannuation Guarantee rate will gradually increase to 12% by July 2025. This increase intends to boost retirement savings for workers and reduce their reliance on the age pension.
2. Introduction of Stapling. Stapling ensures your superannuation account follows you when you change jobs. This change reduces the number of duplicate accounts and minimises fees. The goal is ultimately to preserve more of the individual’s retirement savings.
3. Focus on Ethical Investing. There is a growing trend towards ethical investing within superannuation Australia. They are focusing more on sustainable investments to cater to socially conscious members. Many super funds offer options that align with environmental, social, and governance (ESG) principles.
4. Emphasis on Member Engagement. Superannuation funds are emphasising member engagement more. They offer resources to help members make informed decisions about their retirement. Some of these include personalised advice, online calculators, and educational materials.

Conclusion

Superannuation is a cornerstone of Australia’s retirement savings system. It ensures you have the funds to enjoy a comfortable retirement. You can choose your investment vehicles, such as high-growth funds or ethical investments. This flexibility to choose and manage your super is a standout benefit. The system is adaptive, keeping up with economic trends and increasing the Superannuation Guarantee rates as circumstances change.

Are you ready to take control of your retirement savings? There are lots of superannuation Australia options that you can make the most of. At BrokerRaters, we help you steer through trading and investment. If you want a secure and fulfilling retirement, visit us to learn more and get started!