Many Australians find the stodgy language of superannuation confusing. The terminology associated with superannuation is a barrier to self-education and may deter some Australians from taking early steps to plan for retirement. Millions of Australians care about their super account even though they may find the language surrounding super a bit bamboozling.
An important objective of SuperGuide is to educate and empower consumers to be able to make informed decisions about their superannuation entitlements. As an information site, we also struggle with balancing the delivery of accurate and timely information on super with the aim to communicate the super rules in plain, easy-to-understand language.
One of SuperGuide’s more popular initiatives has been the development of a ‘super for beginners’ section that answers some of the many questions that we receive from those readers who are new to superannuation and new to super’s terminology.
This article that you’re currently reading is also part of the ‘Super for Beginners’ series. For the benefit of both our new and more experienced readers, we have compiled a list of 20 of the most important and/or popular terms in super (see below).
We have also created a comprehensive glossary (in alphabetical order) of more than 300 terms used in relation to superannuation. You can click here to access the glossary.
20 must-know super terms
- Superannuation: The term we use in Australia to explain the process of saving for retirement via special structures called superannuation funds. Apart from compulsory employer super contributions for employees, you don’t have to save for retirement via superannuation. For most Australians however, super offers more generous tax benefits than other savings options.
- Superannuation fund: A legal structure, known as a trust run by a trustee or trustee board. A trustee board is a group of individuals appointed as trustees to oversee the administration, investment, compliance of the fund, and benefit payments. The key difference between a managed fund and a super fund is that with a super fund, you can’t access your money until you reach a certain age, and you get generous tax concessions.
- Superannuation Guarantee (SG): The official term for compulsory superannuation contributions made by employers on behalf of their employees. An employer must contribute the equivalent of 9 per cent of an employee’s salary. From July 2013, the SG percentage will progressively increase until it reaches 12% in 2019.
- Contributions: Typically, cash payments to superannuation funds that satisfy certain rules. For example, an individual cannot make unlimited contributions to a super fund. Contributions are subject to contributions caps.
- Concessional contributions: Before-tax contributions that can include employer contributions (Superannuation Guarantee), contributions made under a salary sacrifice arrangement and tax-deductible contributions by an individual.
- Non-concessional contributions: Super contributions made from after-tax income, including spouse contributions and contributions made under the co-contribution scheme. Note that co-contributions are not counted towards the non-concessional contributions cap.
- Contributions tax: A tax of 15% on concessional (before-tax) contributions. Since 1 July 2012, if you earn more than $300,000, your concessional contributions are hit with an additional tax of 15%, taking the total tax to 30%.
- Excess contributions tax: Penalty tax applicable when an individual exceeds the concessional contributions cap or the non-concessional contributions cap. The penalty tax is imposed on the individual rather than the super fund, although the tax can be deducted from the individual’s super account.
- Salary sacrifice: An arrangement where you are including before-tax super contributions as part of a salary package, which then reduces a person’s taxable salary and the amount of income tax payable.
- Preservation: A payment restriction that prevents a member from accessing superannuation benefits until retirement and reaching a certain age (preservation age), or until satisfying another condition of release.
- Preservation age: The minimum retirement age for accessing your super benefits. Your preservation age is at least 55 years of age and can be up to 60 years of age. A preservation age of 55 years applies to anyone born before 1 July 1960.
- Investment choice: Also known as member investment choice. A feature of most super funds which enables a fund member to choose between a mix of different investment portfolios, such as cash, conservative, balanced, growth or high growth investment options. If you don’t make an investment choice, then your super money is invested via the default investment option, typically a balanced option.
- Fund choice: A person having a say over what type of superannuation fund he or she can join. Fund choice is different from investment choice, which means a person has a say over where a fund invests his super money.
- Nominated beneficiary: A person whom a fund member nominates to receive their super benefits if the member dies. Anyone nominated as a beneficiary must be a dependant or a person’s legal representative.
- Income stream: A series of regular payments over a period of time, just like being paid wages or a salary. An income stream is also known as a pension, but this is not the same pension as the government-funded Age Pension. Most people have a choice of taking their super as an income stream or as a lump sum.
- Account-based pension: A flexible retirement income stream that gives you unlimited access to your capital but no guarantees on how long the money will last. You must withdraw a minimum amount each year.
- Transition-to-retirement pension (TRIP): A special type of income stream/pension that’s available before retirement. You must have reached preservation age (currently 55 years) and you can withdraw no more than 10% of the pension account balance each year.
- Taxable component: The taxable portion of a superannuation benefit. An individual pays tax on this component if he or she receives a benefit under the age of 60 or receives an untaxed benefit. Typically, an untaxed benefit is a benefit paid from an older public sector fund.
- Tax-free component: The portion of a super benefit that’s tax-free regardless of the fund member’s age. Ordinarily this component includes non-concessional contributions and certain pre-July 2007 benefits.
- Taxed source: The benefit is paid from a source (super fund) where tax has been paid on the concessional contributions and earnings of the fund. Most super fund members (90%) belong to ‘taxed’ super funds. Benefits from a taxed source are tax-free after the age of 60.