Superannuation was introduced by the Australian Government as a compulsory system for saving money for your retirement. As government support decreases for retirees in the future, it'll become increasingly important to have enough money to live comfortably when you stop working. Your super is one of the main ways to achieve this.
While it might seem like superannuation is complicated or too far away, it's a great example of how starting today can have a big impact in the future. Whether your immediate goal is financial independence, travelling the world or owning your own home, you can still build super for your future today.
How does it work?
Generally, if you're earning $450 or more (before tax) in a calendar month in Australia, your employer must contribute a percentage on top of your salary directly into your super fund, even if you’re a temporary resident of Australia. This is called Super Guarantee and is currently 9.5% of your salary.
So what exactly is 9.5% of your salary? To put this in context, every eight hour working day you'll put 45 ½ minutes of work into your super, so it's important to understand where your money is going.
Choosing a fund
Most people can nominate a super fund where they want contributions paid by their employer. You'll need to tell your employer which fund you'd like your Super Guarantee paid into each time you change jobs.
If you don't nominate a fund, your employer will pay your super contributions to a default super fund. Default super funds need to be MySuper compliant, meaning that they meet certain standards set by the government.
There are many super funds to choose from with different benefits and services. When choosing a fund for your super, look at all the costs and benefits to make sure you pick one that best suits your needs.
What happens to my super?
Super funds invest your super contributions for you, with professional managers aiming to achieve growth over time. MySuper funds like Essential Super must either have a single diversified investment strategy or alternatively a lifecycle approach. However, most funds also allow members to select from a range of investment options based on their own preferences.
Finding and consolidating super
There are billions of dollars in lost super in Australia1. Many people open new accounts when they change jobs, making it difficult to keep track of where their super is.
One of the most important steps you can take today is to find and consolidate your super. This is usually much easier than you might think and will save you from paying multiple sets of fees.
Topping up your super
Many of us underestimate the amount of super we will need. Even if retirement is a long way off for you, you can get ahead by taking steps to build your super. There are different ways you can contribute extra money into your super and you need to be familiar with the limits and possible implications of these.
Concessional (before tax) contributions - you can ask your employer to redirect some of your salary before it is taxed. These are often called salary sacrifice arrangements and are an effective way to reduce your tax liability. Salary sacrificed contributions are generally taxed at 15% instead of your marginal tax rate which could be as high as 49% (including applicable levies). Depending on your income, the savings you can make by salary sacrificing - provided you stay within the contribution limits - can be significant. For a more comprehensive view on this, you can visit the ATO website.
Non concessional (after tax) contributions - you can make personal contributions from your after tax salary, up to a limit, which you can check on at the ATO website. If you earn less than $51,021 a year and you make a non-concessional contribution, the government also makes a co-contribution to the maximum value of $500. The amount of government co-contribution will depend on your income and how much you contribute.
Keeping on top of your super
Managing your super might seem complicated but it doesn’t have to be. You should be able to review your super balance easily to make sure you're on track.