What Is Superannuation?

What Is Superannuation?

Let me explain superannuation to you—it's an Australian pension program set up by companies for their employees. You deposit funds into a superannuation account, and they grow through appreciation and contributions until you retire.

People often just call it 'super' when talking about these pension plans in Australia. If you're comparing to the U.S., think of it as similar to defined-benefit or defined-contribution plans.

Key Takeaways

Australian superannuation funds are commonly known as super funds. You have two main types: defined-benefit funds and accumulation funds. With accumulation funds, the distributions and total value depend on market fluctuations. Defined-benefit plans avoid market fluctuations but can face mismanagement or funding shortages. Both types come with specific tax conditions based on contributions and your circumstances.

Understanding Superannuation

Funds go into the superannuation by way of employer contributions, and sometimes employee ones too. This fund then pays out pension benefits when you become eligible. You're considered superannuated when you hit the right age or due to infirmity, and that's when you can start drawing benefits.

What sets a superannuation fund apart from other retirement options is that the benefit you get follows a set schedule, not the investment performance.

Types of Superannuation Plans

There are two types of superannuation funds. Let me break them down for you.

Accumulation Funds

In an accumulation fund, you and your employer make periodic contributions, and the fund grows over time. It's built to increase through investment strategies that provide returns, leading to larger distributions.

When you retire, distributions from accumulation funds depend on the returns generated—so the more you contribute and the better it grows, the more you'll receive in retirement.

Defined Benefit Fund

Defined benefit plans distribute based on a formula that guarantees income when you start withdrawals. They're like annuities or pension plans, factoring in your employment length and salary history.

Important Note on Taxes

Superannuations get taxed differently in the U.S. and Australia. If you have an Australian super and face U.S. tax laws, it can get complicated—consult a tax expert to understand your obligations.

Benefits of Superannuation

Superannuation offers several benefits. Fees are generally lower than other retirement options. The features are straightforward, providing what you need with choices for extras. You can select your investment types, from retail, industry, public, corporate, or self-managed super funds.

Your super can stay with you throughout your career, not tied to one employer—these are called stapled super funds. If you're permanently incapacitated, temporarily unable to work, or have a terminal condition, you can access it early without penalty. Super funds guarantee income so you won't run out before you die. Plus, if you qualify, the government contributes up to $500.

Superannuation From Multiple Perspectives

From an employer's view, a defined benefit superannuation gives a fixed benefit based on factors like years employed, salary, and retirement age—it's not tied to market performance. Employers like the predictability, though administration can be complex, and it allows larger contributions than some U.S. plans.

Accumulation funds aren't as predictable but use similar factors. Employers pay a 15% tax on contributions to super accounts. If you're self-employed, you deduct contributions from taxes, but the fund pays 15% on them.

As an employee, in a defined benefit plan, you get a fixed amount monthly upon retirement, based on a formula—it's like Social Security. Accumulation funds can boost or reduce payouts depending on the market, so choose carefully. Consider other retirement savings for tax efficiency.

Fast Fact on Contributions

Non-concessional contributions come from after-tax income and aren't taxed in the super fund. Concessional ones are from pre-tax income and taxed at 15% in the fund. After-tax contributions aren't taxable, but capital gains in the fund can be under certain conditions. You have a super capital gains tax cap for non-concessional gains.

Superannuation vs. Other Plans

Superannuation guarantees a specific benefit once you qualify, unlike other retirement vehicles. A defined benefit super isn't affected by your investment choices, but U.S. plans like 401(k)s and IRAs fluctuate with markets, making benefits less predictable.

Market fluctuations don't impact defined-benefit payouts, but the fund's assets are invested in equities and fixed-income by a trustee—there's risk of underfunding if markets drop. You're generally safe from running out of funds in a defined-benefit plan, unlike other investments where poor performance could deplete them.

Companies must report plan funding annually to tax authorities and share it with employees. If underfunded, they may need to add more funding.

Fast Fact on Market Risks

Market downturns could affect a defined-benefit fund's solvency, leading to underfunding where obligations can't be met.

Common Questions

What do you mean by superannuation? It's an Australian retirement account with two types: one that appreciates and has variable payouts based on markets, and one with defined benefits not susceptible to fluctuations.

What's the difference between superannuation and retirement? Superannuation is the account Australians use to fund retirement, while retirement means having enough wealth to stop working.

What is superannuation in salary? It's a retirement fund from your Australian employer, with contributions from you and them to build retirement wealth.

The Bottom Line

Superannuation is an employer-sponsored retirement account in Australia. There are two versions: one like U.S. defined benefit plans, giving a set amount based on employment time, salary, and contributions; the other like defined contribution plans, where benefits depend on contributions and market conditions.