Although superannuation is a national scheme introduced to make the transition into retirement significantly easier, exactly how does the world of super work?
Once upon a time, the concept of superannuation was seen as a luxury for public servants and white-collar employees of big corporations. In 1986, just 32% of private sector employees had access to a super program, and the funds weren’t transferable between different employers as they are now.
However, that all changed in 1992. The Keating Government introduced the Superannuation Guarantee, which saw a mandatory rollout that required all employers to contribute to a super fund on behalf of their employees. In the early days of super, this figure was a 3% contribution or 4% for employers with an annual payroll above $1 million. Although significantly lower than the current 10% rate, at the time mandatory superannuation contributions were nothing short of revolutionary. In fact, even The World Bank endorsed Australia’s “three pillar” system for coping with an ageing population: compulsory superannuation, the age pension, and voluntary retirement savings, as the world’s best practice for the provision of retirement income – but how exactly does this system work?
In its simplest form, superannuation – otherwise known as ‘super’ – is money put aside by an employer over the course of an employee’s working life. To take the pressure off aged pension benefits, the scheme is designed to provide a financial buffer for employees when they transition into retirement. For most working age Australians, super is a right, and there are heavy penalties for employers who don’t meet their superannuation obligations. As a rule, if you are aged over 18, earn more than $450 before tax per month, and are regarded as an employee for tax purposes, your employer must pay money into a super account in your name, which is then managed by a super fund of your choice.
Employers are legally bound to contribute 10% of your gross income, including bonuses, any commission and loadings. The percentage of the contribution generally increases every financial year, with the rate lifting to 10.5% on 1 July 2022.
In addition, employees are also permitted to ‘top up’ their super themselves, by making their own contributions. When eligible, the government may even add to it through co-contributions and the low-income super contribution, but there are limits on how much you can add per annum. Adding extra funds to your super account can also open the door to extra financial support for first home buyers, thanks to new initiatives such as the First Home Super Saver Scheme.
Once you turn 75, you can no longer make any more voluntary contributions to your super. However, there are some exceptions to this policy, which may include selling your home and making a “downsizer” contribution.
In Australia, there are two types of super funds: defined benefit funds and accumulation funds.
The majority of super funds are accumulation funds. In an accumulation fund, your money grows or “accumulates” over time, thanks to the investments made on your behalf by the super fund. In contrast, in a defined benefit fund your retirement benefit is determined by a formula instead of being based on investment return.
Most defined benefit funds are corporate or public sector funds, and many are now closed to new members.
Many types of super funds fall into one of the following categories:
Your choice of super fund will often influence the types of investments made on your behalf, which is also a primary reason why self-managed super funds are on the rise for those willing to take on the responsibility of adhering to the many regulations.
Superannuation funds manage your money through several different approaches. Investments can be made into property, shares, cash deposits and other assets depending on your default investment profile.
Although most superannuation funds will allow you to choose from a range of investment options and asset classes, choosing the most suitable option will typically come down to your attitude to risk and the time you have available to monitor your investments. As an example, some people may choose to take on more risk with the potential for higher returns in their younger years. They may then look at changing their approach to more conservative options with lower returns as they get older and the time for withdrawing their superannuation gets closer.
Unless exceptional personal circumstances deem accessing your super early to be an appropriate course of action, Australians generally have to wait until they’re a certain age to gain access to their super.
Your preservation age is the earliest age you can access your super, and is calculated based on your date of birth. This is because your super is a preserved benefit, locked away until you reach a certain point in your life.
|Date Of Birth||Preservation Age|
|Before 1 July 1960||55|
|1 July 1960 – 30 June 1961||56|
|1 July 1961 – 30 June 1962||57|
|1 July 1962 – 30 June 1963||58|
|1 July 1963 – 30 June 1964||59|
|After 1 July 1964||60|
However, there is a happy medium to consider when it comes to accessing your super. If you have reached your preservation age but haven’t permanently retired, you can still access part of your super via a transition to retirement pension. For Australians considering this path, it’s important to remember that you’ll generally only be able to access between 4% and 10% of your super each financial year.
If you’ve reached your preservation age and want to keep working, you can use a Transition to Retirement (TTR) strategy. This will supplement your income if you reduce your work hours, or help boost your super and save on tax while you keep working full-time. Setting this up can be complicated, so it’s important to speak to your financial advisor or super fund directly.
For those ready to take the plunge into retirement, your hard-earned superannuation is otherwise issued in one lump sum. At this point, you should also consider how tax may affect your super benefits. Although often unavoidable, the amount will depend on several different factors, such as your age and whether your super comes from a taxed or untaxed source.
Superannuation is designed to support you in your older age once you enter retirement, but there are certain circumstances that can be deemed urgent enough to tap into these funds earlier than planned.
For example, Australians may be permitted to withdraw a certain amount of money from their superannuation benefits on compassionate grounds if they don’t have the capacity to meet critical expenses. These may include medical expenses, funeral costs, or mortgage repayments that may prevent the loss of a home.
Generalised severe financial hardship may also enable accessing super early. If you’re under your preservation age, have been receiving financial support payments from the government for 26 consecutive weeks and can’t meet reasonable and immediate family living expenses, you can apply to withdraw between $1,000 and $10,000 from your super. This can only be done once in a 12-month period.
However, there are no withdrawal restrictions under severe financial hardship. For example, if you’ve received government income support payments for 39 weeks since reaching your preservation age or weren’t gainfully employed on a full-time or part-time basis at the time of application.
If you’re permanently or temporarily unable to work due to a physical or mental medical condition, you may be able to access super as a lump sum or via regular payments over a period of time. In addition, if you’ve been diagnosed with a terminal illness that’s likely to result in your death within a two-year period, there is no limit to how much you can withdraw from your superannuation benefits if you’re younger than the preservation age.
If you’ve been involved in a serious incident and are unable to work but are hesitant about accessing your super early for fear of how it could potentially affect you later on in life, Claimify can provide you with a free online claim check. Claimify lets you know what your options are. Lodge your details within minutes and we’ll do the rest.