How Does Superannuation Work?

Daniel Brown

Financial ExpertUpdated on August 2, 2022

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If you plan to retire within the next five years, you should first have an accurate projection of your retirement income and a careful consideration of your investment options. 

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Superannuation is an integral part of retirement planning in Australia. This article breaks down the complex terms related to superannuation and the steps on how to choose, track, and increase your super. 

The article also covers your super’s cost and other related charges and tax contributions. The different types of contributions, super entitlements, and other super benefits are also discussed.

What Is Superannuation? 

Superannuation is the part of your savings and earnings tucked away in a fund to help you with life after retirement. Super funds provide compensation upon retirement and supplement the age pension. 

To help Australians prepare for their retirement, superannuation has concessions and special tax treatments that apply to super contributions. For some working-age Australians, superannuation is an essential way to ensure sufficient retirement savings. 

Superannuation is composed of two phases:

  1. The accumulation phase is the first leg of your superannuation life. In this stage, all your super contributions are preserved until retirement. Fund earnings and concessional contributions (amount paid into the super fund on a pre-tax basis) in this phase are taxed at the rate of 15%. 
  2. The retirement phase happens when you start a super income stream or pension. There has been a $1.6 million transfer balance cap on the super balance since 2017. The transferred earnings on assets to support the pension income stream are tax-free. 

How to Save Super

If you’re over 18 years old, work full-time or part-time, and earn more than $450 monthly, your employer must pay a percentage of your earnings to your super account. This type of contribution, managed through your super fund, is called the superannuation guarantee (SG). 

SG contributions are super entitlements that also apply if you’re a temporary resident. In addition, you may be eligible if you’re a contractor who’s paid primarily for labour, whether you have an Australian business number (ABN) or not.

In some cases, employers are not required to make SG contributions. For instance, employees who render less than 30 hours a week for private or domestic work don’t get paid super.

Non-Australian residents working abroad, temporary employees of overseas companies, and those holding a specific class of visa covered by other agreements are also not eligible. 

How Super Is Paid

A minimum rate of 9.5% of your ordinary time earnings is the required payment your employer needs to settle into your super. Though this has been the minimum amount since July 1, 2014, it has been gradually increasing over the years. 

Ordinary time earnings are what you get for standard hours of work, including bonuses, over-award payments, paid leaves, and some allowances. 

Payments for overtime hours are excluded from ordinary time earnings. 

SG contributions are compulsory super payments in addition to your salary. Therefore, they don’t affect your take-home pay. Employers calculate SG payments every pay period, but they may opt to make quarterly contributions to your super fund. 

If you’re also making personal contributions to your super fund, make sure you know your employer’s schedule to avoid confusion. 

How to Increase Your Super 

For most Australians, the compulsory nature of SG contributions takes the pain out of saving. However, SG may also motivate a sense of complacency, especially if you’re still at your prime in your working life. 

Comfortable retirement means different things to various people. Therefore, it’s highly encouraged that you set your retirement income target, as a superannuation guarantee may not be enough for you. 

If you feel like your employer’s contributions may not be sufficient to sustain your current lifestyle or the one you hope to have after retirement, you may add to your super by making personal contributions.  

Contributing a little bit more money to your super can make a huge difference to your account balance when you retire. These are called non-concessional contributions, which will be discussed later. 

You may decide to enter into an agreement with your employer that allows you to forego some portion of your salary in exchange for other benefits of similar value. This arrangement is called salary sacrifice contribution. 

To make the most out of your agreement, you should ask your employer to add your voluntary contribution to your employer’s compulsory super contribution. 

Every super contribution made through salary sacrifice arrangements is taxed at a maximum rate of 15% less than your marginal tax rates. 

There are limits called contribution caps for each financial year, which are indexed annually. You may have to pay additional taxes (up to 47%) if your total contributions in a year exceed these caps.

If you’re thinking of contributing more than $25,000 to your superannuation (including employer contributions), it’s advisable to seek professional advice to avoid financial hardships. 

Make sure your financial advisers have Australian Finance Services Licences (AFSL). That way, you can guarantee that your financial service provider and the financial product they offer meet basic standards, such as insurance, compliance, training, and dispute resolution.  

You should also check for any disclaimer or a relevant product disclosure statement of a financial service provider before you do business with them. 

You may also consider a concessional and non-concessional super contribution if you’re thinking about growing your super over time. 

Concessional super contributions are funds that go into your superannuation account from your before-tax income. These contributions are taxed at 15%, and there’s a cap that applies each financial year. 

Below are examples of concessional contributions according to the ATO (Australian Taxation Office):

  • Employer contributions, including compulsory contributions, additional concessional contributions by your employer, salary sacrifice payments, and other amounts paid by your employer before-tax income
  • Contributions allowed as an income tax deduction
  • Notional taxed contributions
  • Unfunded defined benefit contributions
  • Some amounts allocated from a fund reserve 

On the other hand, non-concessional contributions are made from your after-tax income and aren’t taxed in your super fund. These include:

  • Contributions from your after-tax income that you and your employer accomplished 
  • Spousal contributions
  • Personal contributions that aren’t claimed as an income tax deduction
  • Excess concessional contributions that you’ve decided not to release from your superannuation fund
  • Contributions over your capital gains tax (CGT) cap amount
  • Retirement benefits withdrawn from superannuation that you re-contribute 
  • Most transfers from foreign super funds that exclude amounts in your fund’s income 

As mentioned, you may add your own money into your super savings account. The Australian Government also puts money into your super at times.

If you’re a middle-income or low-income earner, you may be eligible for super contributions from the Australian Government. You don’t need to apply for these super contributions as long as you meet the criteria and your fund includes your tax file number (TFN). 

The Australian Government makes a co-contribution of up to a maximum amount of $500 to help boost eligible people’s retirement savings. 

This super entitlement is given to retired Australians who no longer have an eligible super account that accepts co-contribution. They can receive a direct payout. 

To know if you’re eligible, you must meet the following requirements: 

  • You have made one or more eligible personal contributions to your super account during the financial year
  • You’ve passed the two-income tests (10% eligible income test and income threshold)
  • You’re less than 71 years old by the end of the calendar year
  • You don’t have a temporary visa at any time during the financial year unless it’s a prescribed visa or you’re a citizen of New Zealand 
  • You’ve submitted your tax return for the relevant financial year
  • You haven’t contributed over your non-concessional contributions cap 

How to Choose a Super Fund 

If you are eligible, you may choose the super fund that best suits you. Your employer will then give you a standard choice form within the first 28 days you start rendering your service for them. 

There are five types of super funds available, including:

  1. Retail funds, which are managed by financial institutions but aren’t open to all 
  2. Public sector funds, which are usually available to government employees
  3. Corporate funds, which are typically open to those who work for a specific company
  4. Self-managed super funds (SMSF

All employers have a default fund or a nominated super fund where they make super guarantee payments for their employees who haven’t chosen a specific fund type.

If you don’t have a preferred fund, your employer will invest your money in a default MySuper account which has low fees and simple features. 

It’s best to have a chosen fund or start your self-managed super fund (SMSF). That way, you’ll know exactly how your super is invested. 

When you’re comparing super funds, consider weighing the fees you’ll pay against other factors such as investment returns, risk, services, insurance, and fund performance. 

Visit the Moneysmart website of the Australian Securities and Investments Commission (ASIC) for more details. 

What Your Super Fund Does

Once your superannuation fund receives your voluntary contributions or employer contributions, it invests the money in your preferred strategy or a default one, if you haven’t chosen any. 

Most super funds offer various investment options, such as asset classes with different rates of risk and growth. You may choose how you’d like to invest your money or transfer it to another superannuation fund at any time. 

Charges on Super  

Super funds typically charge a percentage of your super balance or a dollar amount for the services the fund managers provide. These services include general fees for member and investment, administration, and optional extras like financial adviser fees and insurance cover. 

How to Keep Track of Super Savings

Make sure your super fund includes your Tax File Number (TFN), so you can keep track of your super and receive super payments from your employer or the Australian Government. 

You may also create a myGov account and link it to the Australian Taxation Office. After taking this step, you can combine multiple super accounts by transferring your superannuation into your chosen super account. 

Creating a myGov account also enables you to find ATO-held super funds and see all the details of your super accounts, including those you’ve lost track of. 

How to Access Super Benefits

Typically, you must reach a preservation age before you can access your super money. The Australian Government has a preservation age that ranges between 55 and 60, depending on your date of birth. 

Circumstances like certain medical conditions and severe financial hardships may allow you to access your preserved super earlier. You may withdraw your superannuation as one lump sum or like a regular salary, known as an account-based pension (allocated pension). 

Certain super annuities and pensions are subject to rules that determine the maximum and minimum amounts to be paid in a financial year. A minimum pension payment must be made on, or after July 1, 2007. 

The minimum payment amounts have been divided for certain annuities and pensions between 2008 to 2009, 2009 to 2010, and 2010 to 2011. 

These payments have been reduced by 25% for 2011 to 2012 and 2012 to 2013, respectively. The reductions during these years only apply to allocated and market-linked pensions and annuities. 

To know more about minimum pension payment and the percentages by age, click here

A superannuation death benefit is a settlement you make to a dependent beneficiary, or the trustee of a deceased estate after a member’s death. You may pay the deceased’s dependents either through a super income stream, or a lump sum. 

If the recipient is a foreign resident, for Australian tax purposes, they also receive the same tax treatment as a resident. However, they’re exempt from the Medicare levy, which is 2% of an Australian residents’ taxable income. 

The superannuation death benefit is an Australian-sourced income. If the beneficiary is a tax resident of a country with a double tax agreement with Australia, taxes may not be imposed. 

The beneficiary should check the taxation laws of their country to know whether their nation has a tax treaty with Australia. 

Your Role in Super Fund 

Your super should continue to accumulate without you having to do much at all. Nonetheless, you should still pay close attention to your superannuation account to ensure you have sufficient super savings for retirement. 

Here are the four steps you may take to ensure that your super continues to accumulate securely:

  • Monitor your employer’s contributions
  • Review your fund’s annual report and annual member statement
  • Keep your statements safe
  • Beware of scams 

If you suspect your employer isn’t paying the correct super, you may review your super fund’s member statement or contact the fund for confirmation. You may also contact the ATO if you’re able to confirm your employer’s failure to pay the super you’re entitled to. 

Moreover, be aware of individuals promoting different plans that promise you early access to your super savings. 

These people will give you reasons why you should get your super savings early, such as buying a property, paying off debts, or even going on vacation. Know that these are scams. You may be heavily penalised for any involvement.

If you have a new job, many things in your life may change. Therefore, it may be an ideal time to take a closer look at your superannuation and the benefits it offers.

Retirement should be about enjoying life without the headaches of working. It’s meant to be a time of relaxation, rest, and doing the things you love. 

Knowing how superannuation works allows you to have a clearer picture of your life after retirement. You’ll make better choices for growing your super when you fully understand the concept of superannuation. 

Still, have questions about super funds that haven’t been answered? Ensure a financially viable future by contacting an expert today!


The more we do to maximise and grow your super today, the more financial freedom you’ll have in years to come find out how a financial planner or adviser can help you with this and more

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