Superannuation is an essential part of every working Australian’s financial life. Also known as “super,” it is a long-term savings account designed to provide income in retirement to supplement or replace the “Age Pension.”
But despite superannuation’s importance, recent surveys show that only 1 in 10 Australians are actively engaged with their super accounts beyond the obligatory contributions made by their employer.
This disengagement is understandable to some degree; it can seem overly complex or simply a “set and forget” scenario that doesn’t require much thought until retirement age. However, not taking an active role in your superannuation may cause you to miss key opportunities to maximise your savings and prepare adequately for the future. Proper planning and an understanding of how super works is key.
So, in this blog post, we’ll explore why superannuation is important, the key benefits it provides, and offer tips on how you can make the most of your account.
History and Purpose of Superannuation Funds
Superannuation in some form has existed in Australia since the mid-1800s, when certain professions began offering pensions to employees after retirement. However, it wasn’t until 1992 that the current compulsory Superannuation Guarantee (SG) system was introduced.
The purpose of making superannuation compulsory was to offset the fiscal burden of providing Age Pensions to a rapidly ageing population. With people living longer and having fewer children, there were concerns about how the Australian government would fund basic financial support for retirees. Superannuation was seen as a way to encourage Australians to save their own retirement funds and rely less on the Age Pension.
Over the past 30+ years since its introduction, the super system has evolved significantly. The SG rate, which is the minimum percentage of an employee’s ordinary earnings that an employer must contribute to their super, has gradually increased from 3% in 1992 to the current rate of 11%. Total super assets under management have also ballooned from around $148 billion in 1992 to over $3 trillion today.
While super was originally envisioned as a supplement to the Age Pension, for many Australians it is now on track to become the primary source of retirement funding. However, the Age Pension will continue to provide a safety net for those unable to sufficiently save for their retirement nest egg.
Super Fund Benefits
Superannuation provides a range of benefits that make it an attractive savings vehicle for retirement. Some of the key benefits include:
Forced Savings for Retirement Income
The compulsory nature of superannuation contributions means that employees automatically save for retirement without having to think about it. Currently, by law, employers must contribute at least 11% of an employee’s ordinary earnings to their chosen super fund. This will continue to increase until it reaches 12% in 2025.
Compound Growth Over Decades
Money that goes into super doesn’t just sit there – it is invested with the aim of growing the balance over time. Thanks to compound growth, even small contributions can snowball into much larger sums after 10, 20 or 30 years.
Tax Benefits
Superannuation receives concessional tax treatment from the government to encourage people to save for retirement. Key tax incentives include:
- 15% contributions tax: Most contributions and investment earnings are taxed at just 15%, compared to marginal rates up to 47% outside super.
- Tax-free investment earnings: Once you begin a retirement phase account, investment earnings are tax-free.
- Tax-free withdrawals: Withdrawals taken after age 60 are generally tax-free.
Income Stream in Retirement
Rather than taking super as a lump sum payment, keeping funds in a retirement account allows for regular income payments. This provides certainty of income in retirement without concerns about longevity or market risks.
Tips for Maximising Your Super
While superannuation already provides significant advantages, there are further steps Australians can take to boost their super balances and retirement preparedness:
Make Extra Contributions if Possible
In addition to compulsory employer contributions, consider adding extra from your take-home pay, such as through salary sacrifice or personal deductions. The tax incentives make this attractive.
Choose Appropriate Investment Options
Rather than keeping your super in low-risk cash options, consider growth assets like shares and property. Long investment timeframes allow for riding out volatility.
Keep Track of Multiple Accounts
Consolidating old super accounts means you pay just one set of fees and won’t lose track of your money. Unclaimed money is eventually transferred to the ATO.
Consider Insurance Within Super
Disability insurance protects your ability to continue contributing if you are unable to work. Life insurance provides financial security for your dependents if you pass away prematurely.
Seek Professional Advice
With constantly evolving rules and conditions around superannuation, getting personalised advice can help you make the most of this vital asset.
Key Takeaways
- Superannuation is compulsory for Australian employees to encourage greater self-funding of retirement needs rather than reliance on the Age Pension
- By law, employers must currently contribute 11% of ordinary earnings to each employee’s chosen super fund
- Money invested in super benefits from decades of tax-advantaged compound growth, making it a highly attractive savings vehicle
- Superannuation assets can provide certainty of income throughout retirement via account-based pensions
- Steps like starting super early, making extra contributions and getting advice can boost your balance
Superannuation forms an essential pillar of Australia’s retirement system, along with the Age Pension and private savings. Failing to engage with your super means missing out on these benefits and inadequate retirement funding.
Contact KNS Accountants and Business Advisors today to understand your options and ensure you make the most of this vital asset. Our financial experts can provide personalised advice on a superannuation strategy, managing multiple accounts, insurance, retirement planning implications and more.
FAQs
Can You Access Your Superannuation Savings Before Retirement Age?
Accessing your superannuation before retirement is very limited under Australian law. The most common circumstances where you can withdraw super early are financial hardship, compassionate grounds, or for a first home deposit. Even then, strict eligibility criteria apply around factors like income testing.
Otherwise, your super is legally preserved and inaccessible until you meet a condition of release, usually age 60 or 65 depending on your date of birth.
Why Is Super Important to the Economy?
Superannuation assets have ballooned to over $3 trillion today, making the sector integral to Australia’s financial system and economy. As the pool of funds continues growing, super is providing an increasingly vital source of patient capital to fund long-term infrastructure projects while still targeting market-level returns for members. Super also allows for reducing reliance on the Age Pension, saving taxpayers money over the long run.
What Does It Mean to Salary Sacrifice Into Your Super?
Salary sacrificing into super means voluntarily contributing more to your superannuation account directly from your pre-tax salary. So rather than receiving this portion of your pay as usual, it gets paid by your employer into your chosen super fund.
This reduces your after-tax income and consequently the amount of tax you have to pay, allowing you to pay 15% contributions tax on the amount rather than your marginal income tax rate of up to 47%. It’s an attractive way to boost your super balance thanks to the tax incentives while reducing your take home pay. Limits apply based on your total super balance and age.
Disclaimer
Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to contractors and small businesses. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal or tax advice. You should, where necessary, seek your own advice for any legal or tax issues raised in your business affairs.
