What is Superannuation? Learn How It Works and Types

Superannuation, often called ‘super’, ensures that Australians build a savings pool for retirement, leveraging both employer contributions and, optionally, personal contributions. With an overview of types, taxation, and investment strategies, this piece will help you understand what superannuation is, how it functions, and how it can be optimised to secure a comfortable retirement.

What is Superannuation?

Superannuation is a government-mandated retirement savings scheme, designed to help individuals save and invest throughout their working lives. This way, Australians have funds set aside to support them financially once they retire.

In essence, superannuation serves as a tax efficient savings and investment vehicle where contributions, primarily from employers and optionally from employees, grow over time. These funds are managed by various super funds with professional investment strategies to grow your retirement savings.

Difference between accumulation and defined benefit funds

Accumulation Funds	Defined Benefit Funds
The value of your superannuation in an accumulation fund depends on contributions made and the fund's investment performance over time. Most Australian super funds are accumulation funds.	In defined benefit funds, your retirement benefits are calculated based on factors like your salary and years of service rather than the contributions and investment returns. These funds are less common, generally closed to new members, and are usually offered by government or corporate employers.

Types of Super Funds

There are various types of super funds available, each designed to suit different needs and investment preferences. Let’s explore these options:

Industry Funds: Non-profit funds often associated with specific industries. They typically
have lower fees. legalsuper is an industry fund.
Retail Funds: Usually run by financial institutions and often offer a wider range of investment
options but may have higher fees.
Corporate Funds: Arranged by some employers, primarily for their employees. These can be
either accumulation or defined benefit funds.
Self-Managed Super Funds (SMSFs): These funds offer more control over investments and
are managed by the individual, typically requiring significant investment and responsibility.
Public Sector Funds: Designed for government employees, often with unique benefits and
conditions compared to other types of funds.

The Importance of employer and personal contributions

Employer contributions

Regular contributions to superannuation, including those from employers, the government, and individuals, are essential for building a strong retirement fund. Under Australia’s superannuation guarantee (SG), employers are legally required to contribute a percentage of their employees' earnings to their super fund. Currently, the super rate is set at 11.5%, with planned increases in the coming years.

Personal contributions

Beyond the mandatory contributions made by employers, Australians can strengthen their superannuation savings through additional (or personal) contributions. These extra contributions, whether pre-tax (salary sacrifice) or post-tax (voluntary contributions), have the potential to make a significant impact on retirement savings. A crucial advantage of these additional contributions is their tax efficiency. Superannuation contributions are taxed at a lower rate compared to most personal income, which not only reduces taxable income but also maximises the amount invested for retirement.

How to Make Contributions to Your Super Fund

Understanding contributions is key to maximising your super balance. The main types of contributions include:

Employer Contributions

Mandated by the superannuation guarantee, these contributions are a core part of your retirement savings. Your employer will make these contributions on your behalf.

Personal Contributions

Individuals can make voluntary contributions from their post-tax or pre-tax income (known as salary sacrifice). You can make a post-tax contribution via BPAY, Electronic Funds Transfer (EFT), direct debit and more.

Government Contributions

For eligible low-income earners, the government may match contributions up to a certain limit. Learn more about how to boost your super in this way on our dedicated co-contribution page.

Spouse Contributions

If one spouse has low or no income, the other can make contributions on their behalf and may receive a tax offset. This is called the spouse super contribution.

Understanding Taxation of Super Contributions

Australia’s tax system incentivises super contributions but with some key distinctions:

Tax on concessional contributions

These are pre-tax contributions (such as employer contributions or salary sacrifice) and are generally taxed at a concessional rate of 15% within the super fund.

Tax on non-Concessional Contributions

These post-tax contributions are made from after-tax income and are not taxed when contributed, as the individual has already paid tax on this income before contributing it to their super fund. If you make post-tax contributions, you can then claim them on tax (they then become concessional contributions and contribute to that cap).

Other tax considerations

Earnings Tax in super

Accumulation Phase
Earnings generated by investments within the super fund (e.g., dividends, interest, and capital gains) are taxed at 15%.
Retirement Phase
Once a super fund member moves into the pension or retirement phase (subject to the transfer balance cap), earnings on assets supporting a pension are generally tax-free, providing a significant advantage for retirement income.

Capital Gains Tax (CGT) in super

Capital gains on investments held within the super fund are taxed at 15% if sold within a year. However, if the asset is held for over 12 months, the CGT rate can be discounted to 10%.
In the retirement phase, no CGT applies on asset sales for funds supporting pensions, which can be a tax-efficient strategy for retirees.

Withdrawal Tax in super

Generally, for individuals over the age of 60, withdrawals from a taxed super fund in the form of pensions or lump sums are typically tax-free.
For those under 60, tax may apply, depending on the individual’s age, withdrawal amount, and the tax components of their super balance.

Investment Strategies for Superannuation

Investment strategies within super funds vary and significantly influence your balance over time. Key strategies include:

Growth: High exposure to shares and property, ideal for younger individuals with a long-term horizon.
Balanced: A mix of growth and conservative assets, suitable for individuals looking for moderate growth with lower risk.
Conservative: A focus on lower-risk assets like cash and bonds, ideal for those closer to retirement.
Lifecycle Investment: Automatically adjusts risk exposure based on age, lowering risk as retirement nears.

When you can access Your Super

Accessing your super is regulated to preserve retirement savings. Generally, you can access your super:

At Preservation Age: Typically, between 55 and 60, depending on your birth year.
Other Conditions: In cases such as financial hardship, compassionate grounds or terminal illness, early access to your super may be granted.

What to Do If You Have Lost or Unclaimed Super

The Australian Taxation Office (ATO) offers resources to help you locate lost or unclaimed super. Here’s how you can find and consolidate your super:

Use MyGov: Link your ATO account via MyGov to check for lost or unclaimed super.
Contact your previous super funds: If you’ve changed jobs frequently, it’s possible you have multiple accounts with different funds. Contact them to verify.
Consolidate Your Super: Consolidating accounts reduces fees and helps grow your retirement savings faster. Before consolidating, you should compare the benefits, investment performance and costs of different super funds.

Understanding superannuation is essential for securing your financial future in retirement. By choosing the right type of fund, staying informed about tax implications, and monitoring your investment strategy, you can ensure your superannuation is effectively supporting your retirement goals. With the right contributions and a well-thought-out plan, your superannuation can be built into a powerful financial resource for the future.