What is Superannuation & How Does it Work?

We all know super is there, but it often doesn’t get much attention until retirement is around the corner and we start wondering how we’ll replace our income.

So, what exactly is superannuation, and how does it work? In this article, we’ll break it down and highlight some benefits you might not even know about yet.

What is Superannuation?

Super is a system designed to help you save for retirement. It builds through contributions from you or your employer, and it’s generally locked away until you retire. Your super balance is invested while you’re working to help it grow faster.

If you're employed, your employer is required to contribute a set amount into your super. You can also make extra contributions, and if you're self-employed, you can add personal contributions, some of which are tax-deductible. Once retired, you can turn your super into an income stream for your living expenses.

How Does Superannuation Work?

Choose a Super Fund

If you're employed, your employer sets up a super fund for you. You can stick with it or switch. Self-employed?  Find a fund that suits you. If you want more control, a Self Managed Super Fund (SMSF) is an option, but it comes with extra responsibilities.

Decide on Investments

Super funds offer different investment options ranging from low risk to high risk. Pick one that aligns with your risk tolerance and retirement goals.

Make Contributions

Your employer contributes 11.5% of your salary to your super as of writing this. You can also make additional contributions, either through salary sacrifice or personal contributions. Self-employed? You make your own contributions.

Choose Insurance

Many super funds offer insurance like life, total and permanent disability (TPD), and income protection. You can include these in your super, but be aware of limitations and implications.

Transition to Retirement

As you near retirement, you can start using your super to supplement your income. Maximise contributions and use tax-effective strategies before retirement.

Retirement Income Stream

Once retired or you meet a condition of release, you can convert your super into a retirement income stream and enjoy tax-free investment earnings.

Benefits of Superannuation

The main benefit of super is the tax advantages. By contributing to your super through salary sacrifice, you can reduce your taxable income. Investment earnings within super are taxed at a maximum of 15%, which is often lower than outside super. Once retired, your investment earnings are tax-free. The tax benefits help grow your super and support you longer in retirement.