What is superannuation?
Superannuation is a tax advantaged way of saving for retirement and makes up two of the three “pillars” of the Government’s retirement income policy. The three pillars are:
- A Government funded means-tested age pension
- Compulsory superannuation contribution (i.e., the Superannuation Guarantee)
- Voluntary superannuation contributions
Superannuation is often simply referred to in everyday conversation as “super”. The Australian superannuation sector has grown to become one of the largest private pension funding arrangement in the world with assets exceeding $3.5 trillion as at the end of December 2021.
Investing Money within Superannuation
Most superannuation funds will provide their members with some flexibility in deciding how they would like their superannuation savings invested. The range of investment options will vary between funds with some funds offering only a small number of options, through to other offering hundreds of different investment options.
Unless you are an experienced investor, it would be prudent to seek specialist advice from a licensed financial planner before deciding where your superannuation savings are to be invested.
What are the advantages of investing in superannuation?
The advantage of superannuation is that investment earnings are taxed at a maximum of 15%, compared to investments held in your personal name which can be taxed at up to the highest marginal tax rate of 45% (including Medicare levy). In addition, if you convert your superannuation into an account based pension (also known as a retirement income stream) this tax reduces to 0%.
What are the disadvantages of investing in superannuation?
The main disadvantage of investing into superannuation is that the Australian Government has strict rules about when you can access your money, as it is designed to fund your retirement. In most cases, the earliest you can access your superannuation is when you reach your preservation age.
Superannuation consists of two distinct components:
Compulsory Superannuation
If you work in Australia, your employer may have to contribute to a superannuation fund for you under the Superannuation Guarantee system if you:
- Are over 18 years of age, working on a full-time, part-time or casual basis; or
- If under 18 years of age, you are employed for more than 30 hours per week.
In certain limited situations, and industrial award or workplace agreement may impose additional superannuation obligations of an employer.
Superannuation payments are paid by your employer in addition to the salary or wages you receive. If you are eligible for superannuation, your employer will pay your superannuation directly into a superannuation fund.
Voluntary Superannuation
In addition to compulsory superannuation contributions, individuals may make their own personal and tax-deductible contributions and employers may make additional contributions for an employee, generally structured under a “salary sacrifice” arrangement. Salary sacrificed contributions are made from an employee’s pre-tax salary
Source: Centrepoint Alliance, September 2023
Information on this site may be regarded as general advice. That is, your personal objectives, needs or financial situations were not taken into account when preparing this information. Accordingly, you should consider the appropriateness of any general advice we have given you, having regard to your own objectives, financial situation and needs before acting on it. Where the information relates to a particular financial product, you should obtain and consider the relevant product disclosure statement before making any decision to purchase that financial product.
