What is superannuation and how does it work?

Key points

  •  Superannuation is a government mandated scheme to help individuals to save for retirement
  •  While you are working, money is put into a superannuation account which is invested and can only be accessed once you retire (age 65)
  • Employers are required to contribute at least 9.5% of your salary into superannuation
  • There are several incentives to contribute to superannuation in the form of tax breaks which can mean more money in your pocket when you retire

What is superannuation

At its most basic, superannuation is a government legislated arrangement that aims to help Australians to save for their retirement. Think of it as a forced savings scheme.

The idea is that while you are working, a compulsory amount (it is possible to voluntarily contribute more) of your salary must be put into superannuation. This amount is held in trust by a Superannuation trustee and is invested on
your behalf. You are unable to access this money until you retire when hopefully you will have accumulated enough savings to live on.

The government encourages saving using superannuation by offering tax incentives.

  • Money that is contributed (up to certain limits) to superannuation is not included as personal taxable income.
  •  Income within a superannuation fund is taxed at a flat 15% rather than the personal marginal tax rate which can be up to 47%
  • Withdrawals and income (up to certain limits) from superannuation after retirement are not considered personal taxable income

If individuals are able to fund their own retirement, this significantly reduces the burden on social security and therefore the government provides incentives, mostly in the form of tax breaks, to encourage you to put more into

Superannuation trustees, often referred to as Super Funds come in all shapes and sizes. They could be for profit financial institutions, not for profit industry fund or you can even choose to manage your superannuation yourself by
setting up a self managed superannuation fund (SMSF).

Most employers will allow you to choose which superannuation fund you want to use. Some employers with industrial agreements will only have a fixed superannuation fund you can use. It is helpful to confirm this.

How much money will go into superannuation?

If you are over 18 and earn more than $450 before tax in a calendar month your employer must contribute a portion of your salary into superannuation. The amount that is contributed to superannuation is call the superannuation
guarantee. For the financial year ending 30 June 2019 this percentage is 9.5%. It will increase to 10% from 1 July 2020.


If you annual salary was $100,000 then your employer would need to contribute $9,500 to your superannuation.

How much can I put into superannuation?

As there are tax incentives for superannuation contributions each year you can contribute up to $25,000 (in 2019) into superannuation from pre-tax income. Superannuation guarantee contributions made by your employer are
included in the $25,000. Contributions greater than $25,000 per annum attract tax at high tax rates which is designed to limit the size of super funds and prevent tax avoidance by the very wealthy.

It is possible to “carry forward” unused portions of the annual $25,000 cap if you have a superannuation balance below $500,000 and make larger contributions in future years. This flexibility can make it easier for people to save
for retirement if they have interrupted work patterns.

How is my money invested?

Superannuation funds pool the money that has been contributed by its members and invest them in various assets such as cash, shares (Australian and Global), property, infrastructure projects , etc. Each of these different types
of investments will have different levels of expected return and risk. Generally the riskier the asset the higher the return that is expected. The value of your superannuation will vary depending on the change in value of the assets
that the fund has invested in.

Superannuation funds often have different investment options that you can choose. These can be based around the type of asset that is invested in, for example shares vs property, the style of investment — active vs passive, or
the asset mix — 20% cash, 30% property and 50% shares vs 50% cash and 50% fixed interest.

What else does superannuation do?

Most superannuation funds also offer personal insurance including life insurance + TPD and income protection insurance. The superannuation funds are able to spread the insurance risk across its member base and therefore
often include a base level of insurance for all members which you may be able to increase for additional cost. The insurance premiums are paid from your superannuation balance and can therefore free up your current cashflow
(at the expense of retirement savings).