What is a Superannuation Fund, and How Does It Work?
Superannuation is a compulsory contribution that companies have to pay on behalf of each employee.
Do I Have to Open a Superannuation Account?
- over 18 and working part- or full-time;
- under 18 and working more than 30 hours per week;
- earning $450 or more per month (before tax); and
- a temporary resident with a Tax File Number (TFN).
When you’re eligible for a super account, your employer will give you a superannuation standard choice form to fill out. This form is about choosing a super fund.
There are a few types of superannuation funds that each offer different investment options. If you’re unsure which super fund to choose, it will be chosen by default to your employer’s preferred super fund.
Don’t worry – you can apply to have your type of superannuation fund changed later if you need it.
If you would like to open a superannuation account yourself before you are eligible to have your employer do it for you, you can do so online or through your bank.
This is generally only if you’re not registered with a TFN yet. To apply for a TFN, you can apply online.
What Are the Different Categories of Superannuation Funds?
While there are various types of superannuation funds, they all fall within these two categories:
(a) accumulation funds, or
(a) accumulation funds, or
Both options’ end values rely on how much money your employer contributes and how much extra you supplement it with. But, there are a few key differences to consider before choosing a superannuation fund.
Accumulation Funds
This is the most common choice of superannuation.
You can choose which investment option you prefer. The balance value is determined by how well the investment does over the years. If there are profits from your investment, they will be added to your account.
If you are unlucky, investment losses will be withdrawn from your account.
In either instance, you are charged administration fees.
Defined Benefits Funds
Most defined benefits funds are now closed to new members.
Unlike accumulation funds, where you are unsure of your end balance, this fund is specific. Your employer chooses how your superannuation will grow over the years, and they take on the investment risk instead of you. Typically, the longer you work there, the better it will be.
Some examples include:
- a percentage of your salary for each year of employment with them; and
- your final or average salary over a few years.
What Are the Different Types of Superannuation Funds?
MySuper
If you didn’t choose your own superannuation fund when joining the company, your employer allocates a MySuper account to you by default.
This is a government initiative to provide employees with cost-effective and low-fee funds. Fees are only intended to cover the cost of the service, such as administration and investment fees.
MySuper funds are all accumulation funds.
Retail Funds
These are superannuation funds usually run by banks, financial institutions or investment companies – for individuals.
They are often recommended by financial advisers, who then monitor them for you. They can also provide advice on how much risk or aggression to take on when investing.
Generally, anyone can join, and they are accumulation funds too.
There are a few companies that offer large retail super funds:
- AMP superannuation
- BT superannuation
- Colonial First State superannuation (Commonwealth Bank)
- MLC superannuation (IOOF Holdings)
- OnePath superannuation (IOOF Holdings)
Industry Funds
These are superannuation funds run by employer associations and unions rather than shareholders.
They run on a member-first model, and they redistribute profits of investments directly to their members without taking any profit.
Some industry funds are open for anyone to join, but different funds are available to specific people from different industries.
Here are some of the biggest industry super funds:
- Australian Super
- Aware Super
- HESTA
- Hostplus
- Rest Super
- Sunsuper
- Unisuper
Employer / Corporate Funds
Employers establish these for their employees.
An appointed board of trustees runs larger companies’ corporate funds. Smaller corporate funds are retail or industry funds but are only available to the employees of that company.
Most are accumulative funds, but some older corporate funds still have a defined benefit.
Public Sector Funds
These are available to people working in the public sector, such as Federal and State Government employees.
Most offer a member-first model. Typically they are accumulative funds, but some long-term members still have a defined benefit.
Self-Managed Super Funds (SMSF)
These are private superannuation funds that you manage in your personal capacity instead of being controlled by a fund manager.
You choose the investments and insurance.
This option should only be considered if you are committed and understand everything that SMSFs entail. Being responsible for your own super fund is a lot of work and can be very high risk. Working alongside a financial adviser and making use of their services is advised.
Superannuation and Tax
Superannuation is more of a low-tax savings structure than an asset.
Rather than potentially up to 47% tax, superannuation funds are capped at 15%, and it reduces to 0% when you retire – once you access your superannuation fund, whether as a lump sum or an income stream, it is tax-free.
Making additional personal contributions into your superannuation fund can be more advantageous than putting that money straight into your pocket. These contributions are typically taxed at a lower rate than your marginal income tax rate, meaning that you save on tax.
Adding Extra Contributions to Your Superannuation Fund
Voluntary superannuation contributions to your fund can reduce the amount of tax you pay.
Keep in mind that there are contribution caps in place limiting how much you can contribute before paying extra tax.
- Pre-tax salary sacrifice / concessional contributions: you can request that your employer pay some of your pre-tax salaries into your superannuation account. This will be taxed at only 15%.
- After-tax salary sacrifice / non-concessional contributions: because these contributions have already been taxed, they are not taxed once they are in your superannuation account. These are made personally into the superannuation.
What Are the Common Mistakes People Make With Superannuation?
Don’t fall into the trap of underestimating the value of preparing for their future.
Some people don’t think they will make it to retirement age and don’t want to put away savings towards their pension.
The more you learn about superannuation, how it works, the different types of superannuation funds and their benefits, the more informed a decision you can make about your future.
Don’t just assume that your employer is contributing as they should be. Be sure to check your payslip. You can also view your superannuation account balance online. If needed, you can dispute any discrepancies with the ATO.
Key Takeaways
The more you understand superannuation and the different types of funds, the more informed decision you can make on which one suits you best.
Money invested into a superannuation fund is taxed at a much lower rate than money invested in your own name.
When you retire and finally receive this money after the age of 60, you do so tax-free.
Choosing the correct type of superannuation fund to suit you is crucial to maximising your wealth, particularly as you retire. Unfortunately, it can also be confusing and overwhelming.
If you would like a more detailed explanation from someone with years of experience, call Tandem Financial today. Our friendly staff can offer support, guidance and strategies to set you up on your road to retirement.
Digital Recipe