When learning more about superannuation and retirement planning, a good place to start is trying to explain what superannuation actually means. Superannuation is an awkward word, but in plain English, when most people refer to superannuation, they are referring to a special long-term savings account with tax benefits. Superannuation is more commonly called ‘super’.
Superannuation is designed to help you accumulate savings for retirement, although using a superannuation account is not the only way to save for retirement. Due to the tax incentives associated with superannuation, and the fact that employers must make regular super contributions on behalf of employees, super is the most popular way to save for retirement.
How does a superannuation account operate?
Your superannuation account exists only because you, your employer or someone else makes regular cash contributions to your super fund. A superannuation fund is an investment vehicle that receives special tax concessions from the federal government. The cash that is held in your superannuation account is then invested in assets to generate returns for your eventual retirement.
Apart from the return on your super investments, and the costs or fees your super fund charges against your super account, a healthy superannuation payout on retirement depends on the amount your employer (or you) contributes to your fund throughout your working life.
Your super life starts when you join (or your employer joins on your behalf) a superannuation fund.
When you understand the basics, you can forge a strong financial future for yourself through superannuation. A weekly, monthly or quarterly contribution to a super fund can provide you with multiple investment choices and tax breaks, and insurance protection if you become disabled before you retire. You can considerably boost your final superannuation benefit by making your own contributions to your fund. You may also have the flexibility to structure your contributions in a way to reduce the amount of income tax that you pay.
Note: Superannuation Guarantee (SG) is the official term for compulsory superannuation contributions made by employers on behalf of their employees. A SG contribution represents an employer contribution to a super fund that is equivalent to 9.5% of an employee’s ordinary time earnings. For example, on a $50,000 a year income, that amount works out to be $4,750 a year.
If you’re self-employed, you don’t have an employer making super contributions on your behalf but you do have access to tax deductions when you make your own superannuation contributions.
Why do people talk about tax-free super, and is it true?
If you withdraw super benefit payments on or after the age of 60, your super benefit payment will be free of payments tax and income tax. The two main exceptions to this standard rule is where you are a member of certain public sector funds (and some tax may still apply), and since 1 July 2017, certain recipients of private and public defined benefit pensions.
Technical note: Most super pensions are not defined benefit pensions (for information about defined benefit pensions, click here). The majority of super pensions are known as account-based pensions, and the benefits paid from account-based super pensions, depend on the opening balance, accumulated earnings on those savings and the amount the account holder chooses to withdraw, subject to a minimum payment requirement.
On the SuperGuide website, we have a special section called Super for Beginners, dedicated to those readers starting out on their super journey. You could be 16, 32, 64 or even older, this special section is designed for anyone who wants to learn more about the basics of super, or about the basics of a certain aspect of super. For older readers, we also have a special Age Pension section, and retirement sections.
The following SuperGuide articles can be a starting point, and hopefully assist you with your journey:
- Super for beginners: Top 10 must-know facts
- Super for beginners: 8 steps to super success
- Super health check for beginners: 10 tips for your 2017/2018 retirement planning
- Super for beginners: 14 monkeys stop women creating a dream retirement
- How much super do you need to retire comfortably?
- Retirement planning: Choosing the right super strategies for your age
- Life insurance and super: 10 things you should know
- Fund choice: Comparing super funds in 8 steps
- Super for Beginners (27 Q&As)
For more detailed information on super and retirement planning, see the following SuperGuide articles:
- Financial freedom: Retirement planning in six steps
- SuperGuide checklist: 10 ways to save your super
- SuperGuide checklist: 10 more ways to boost your super
- Superannuation and employees: 10 facts about your super entitlements
- Superannuation tax refund: 10 things you should know
- Super contributions caps for the 2018/2019 year (and 2017/2018 year)
- Salary sacrifice and super: A guide for employees and employers
- Accessing super: What is my preservation age?
- Tax-free super for over-60s, except for some
- Australian Age Pension: 10 important facts you should know
- Latest superannuation rules: 2018/2019 guide