What is superannuation?
Superannuation is a way of saving for your retirement. Both you and your employer can make contributions that accumulate over time and this money is then invested in shares, government bonds, property, or other appropriate investments.
On retirement, or after disability or death you then receive the money (less charges and taxes) as regular periodic payments (ie, a pension), a lump sum payment, or a combination of both.
What does the employer contribute?
Employers must contribute to an employee's superannuation fund. This is called the Superannuation Guarantee, which came into operation on July 1, 1992.
The amount of the contribution is currently 9% of an employee's wages (excluding overtime, leave loading and fringe benefits).
Are any employees left out?
Yes. The Superannuation Guarantee (Administration) Act says that employers do not have to pay the Superannuation Guarantee in certain circumstances. Some of the exceptions are:
- employees earning less than $450 per month;
- employees under the age of 18 who work 30 hours per week or less;
- employees over 70 years of age (it is proposed to abolish this from 1 July 2013);
- anyone paid to do domestic or private work for 30 hours per week or less.
Can the employer pay more?
An employer can make payments above the compulsory superannuation guarantee as:
- a reward for a worker's performance;
- a type of co-payment, where the employer's contribution increases in line with the employees voluntary contribution;
- or a 'salary-sacrifice' - this is where the employer makes a contribution that would otherwise be paid as salary. Note, there are limits to the amount of salary sacrifice that can be made in a financial year. From 1 July 2009, the cap is $50,000 for those aged 50 and over, for those under 50 it is $25,000. Note, the 9% compulsory contribution is included in these caps and if you go over the caped amounts, you may find a nasty tax surprise!
If you want your employer to pay more, you should get advice from a financial advisor, but keep in mind that employers are limited in the amount that can be claimed as a deduction for superannuation contributions made for a particular employee. Check with your superannuation fund or the Australian Tax Office to find out what these limits are – they change each year.
Should I contribute too?
If you have money left over after your weekly expenses, and you want to save for the future, you may want to consider making superannuation contributions as compared to other forms of investment. Note, there are limits that affect whether or not you can contribute to superannuation. There are also limits to the amount you can contribute – for details see the Australian Taxation Office web site.
Some of the advantages are:
- generally, you pay less tax on interest from superannuation savings than bank interest;
- with a 'salary sacrifice' the superannuation contribution is taken straight out of your wages, so you are not tempted to use it for purposes other than savings. Note there are limits to the amount that you can "salary sacrifice" - see above;
- the interest on superannuation savings is 'compounded', that is, interest earned by the superannuation fund is added to the total investment, so the interest earns more interest. The Australian Prudential Regulation Authority estimates that a sum of money 'compounded' at 7% a year will double in value in ten years; and
- you may be able to access the benefits of the low income super rebate and low income spouse rebate.
- you may be able to access financial incentives offered by the Government such as the co-contribution scheme. Under this scheme Government will contribute up to $1000 (depending on your income) when you contribute to your fund. Note - It is proposed that the contribution from Government will reduce to $500 in 2012- 2013 financial year. Check the Australian Taxation Office web site for details.
Ultimately, the pros and cons of contributing to superannuation is something you should get advice about.
What are the tax advantages?
The maximum tax rate for your employer's contribution is 15%.
The income you earn through the fund's investments is also taxed at a maximum 15% rate.
Salary sacrifice contributions will be taxed at 15%.
Most people over the age of 60 can now withdraw superannuation as a lump sum or income stream tax free.
There are also tax advantages if you contribute to your spouse/de facto's super fund. The set off depends on their income. Check the Tax Office for details.
What laws apply?
The main laws that apply to superannuation are the:
- Superannuation Industry (Supervision) Act and Regulations (regulates most private superannuation funds);
- Superannuation Guarantee (Administration) Act and Regulations (tells employers the minimum contribution they must pay);
- Income Tax Assessment Act
Accumulation funds - money is invested and the final benefit depends on the total contributions, plus earnings of the fund.
Annuity - like a pension. You receive regular periodic payments for either fixed amount of time or until you die.
Benefit - the money paid to you out of the superannuation fund or held on your behalf within the fund.
Contribution - the money paid into the superannuation fund by either you or your employer.
Defined benefit funds - the final benefit is paid on the basis of a specific formula, so the employer carries the risk if the growth of the fund does not cover the benefit.
Lump sum - money received in a single payment.
Preserved - money that you cannot withdraw from your fund until retirement or certain other events, e.g. reaching a certain age and leaving employment either temporarily or permanently. This includes money paid by your employer, interest earned on that money or contributions paid by a self-employed person which have been claimed as a tax deduction and any undeducted contributions you make after 1 July, 1999.
Rollover - transferring money from one fund to another.
Unrestricted or non- preserved amount – money that can be paid to you at any time form your superannuation fund
Rights to information
You are entitled to certain information from your superannuation fund. This includes:
- a member statement which shows the amount of your benefit at the start and end of the relevant period, the amount that is preserved and contact details (generally provided annually);
- a fund report which shows the fund's financial position (generally provided annually); notification of changes that affect you, e.g. a change to the superannuation fund's rules; and
- a statement that shows your benefit, including death benefits when you leave.
Last Updated – June 2012