Whether you're starting your first job or planning for retirement, understanding how superannuation works is key. In this straightforward guide, we’ll help you navigate the essentials of superannuation, from contributions and investment options, to accessing your funds in retirement.
What is superannuation?
Superannuation is a way of saving money for your retirement. When you work, a percentage of your earnings is set aside in a super fund account, which is made accessible to you when you retire and reach your preservation age. This amount can grow over time, based on how much is contributed and how your chosen fund invests your money.
Superannuation is a long term investment, but it shouldn’t be thought of as a set and forget decision. The fees you pay, the investment returns, and asset allocation will determine how much super you will have at the time of retirement and the kind of retirement you’ll be able to financially enjoy. Engaging with your super at all stages of your life is important.
How does superannuation work?
Superannuation is the way that most Australians save for their retirement. Employers are required to pay a percentage of your earnings (current minimum 11.50%) in your super account - and your chosen super fund will invest this on your behalf until your retirement.
This is called the super guarantee and is just one type of contribution that can be made into your account.
When you retire you will be able to withdraw the funds in your account to pay for your living expenses, provided you’ve met all requirements related to age and retirement status.
You can choose which super fund (or super provider) you want to manage your investments, and this provider will generally let you choose between a menu of investment options based on your goals and risk tolerance. We’ll get to the various options later in this guide.
Want to know more about contributions?
Click to explore our comprehensive guide. View
How do super funds invest my money?
Super funds invest your money in a diverse range of assets to help it grow over time.
Understanding these asset classes can help you make informed decisions about your super. Here are a few of the most common:
- Shares. Both Australian and international stocks - can offer high returns at a higher risk.
- Property. Commercial and residential real estate, providing income through rent and potential value growth.
- Bonds. Interest-bearing loans to companies or governments - generally lower risk than shares.
- Cash. Low-risk savings options that earn interest.
- Other assets. Including infrastructure projects, hedge funds and private equity - providing diversification and potential for higher returns.
As of March 2024, total superannuation assets equalled $3.9 trillion according to the Association of Superannuation Funds of Australia (ASFA). The infographic to the right shows how it broke down by asset class.
What investment options do I have?
When it comes to selecting the investment option - or investment mix - within your chosen fund, you’re likely to have a few options. Which investment option is best for you will depend on a couple of factors such as:
- How long you’ll be investing for.
- How hands-on you’ll want to be, and
- Your risk tolerance.
Some of the most common types of pre-mixed options offered by super funds include:
- Conservative. Typically lower risk with a focus on stable returns, primarily invested in bonds and cash.
- Balanced. A mix of risk and return, with investments typically spread across shares, property, bonds and cash.
- Growth. Higher risk aiming for higher returns, primarily invested in shares and property, with a small percentage allocated to safer options to provide some balance.
- High growth. Maximum risk with the aim of highest returns, mainly invested in shares, property and other high-risk assets.
- Single sector. Focuses on a specific sector, like property or international shares. The risk level depends on the chosen sector, with some sectors being more volatile than others.
Special types of investment options
These following investment options don’t fall neatly into the categories above (for different reasons), but they are important to consider:
- MySuper. These are low-fee (and typically low-risk, low-reward) investment options designed as the default for employees who don't choose their own fund or investment mix. These government-approved options, within the employer-chosen super fund, protect employees' savings from high fees.
- Ethical super funds and ethical investment options. These focus on sustainability and social responsibility and can be found at both the fund and investment options levels. Ethical investments avoid sectors like tobacco, fossil fuels and weapons manufacturing. They can be conservative, balanced, growth, or other types, allowing you to align your investments with your personal values.
How is a superannuation fund different to a superannuation provider?
We get it, the word 'fund' is everywhere: 'My retirement funds are in the balanced fund managed by my super fund.' It’s like a fund overload! So, let’s clear up the confusion.
- Superannuation fund. The term ‘superannuation fund’ means the same thing as ‘superannuation provider’ or ‘superannuation company’.
- Investment options. Your super fund (or provider) will usually offer a menu of investment options or investment mixes.
- Your investments. The money in your account can colloquially be called your funds, but for clarity sake, let’s refer to this as ‘your money’ or ‘your investments’.
Main types of super funds
Now that we know what a fund is and how it differs from an investment option, it’s time to look at how various funds can be categorised, based on their structure and purpose.
- Retail. Retail super funds are open to anyone and are usually run by financial institutions or investment companies.
- Industry. Industry super funds were originally set up for employees in specific industries, but many are now open to everyone.
- Public sector. Funds for government employees.
- Corporate. Funds arranged by companies for their employees.
- SMSF (Self-Managed Super Funds). These funds allow individuals to manage their own super investments.
Unless you decide to set up your own SMSF, or your employer has its own walled-off public sector or corporate fund, you’ll most likely go with a retail or industry super fund.
There are some differences, but the options available in retail and industry funds have become quite similar. Your choice will ultimately depend on the specific features, fees and investment options that best suit your needs.
How to find the cheapest super funds
When looking for the cheapest super funds, it's essential to understand the fees involved. And we can’t emphasise enough that cheap doesn’t always mean better.
Generally speaking, the cheapest options use simplistic investment strategies—for example, those that park your investments into low-risk, low reward investments like cash or bonds. In options like these, there’s minimal trading, and fund managers provide minimal active oversight. Hence the lower fees.However, you can expect to pay more for more aggressive investment options. In these more actively managed funds, you’re paying for the expertise of fund managers to make strategic investments and for the costs associated with frequent trading, which aims to achieve higher returns.
To save on fees, compare similar investment options across different super funds. For example, if you prefer a growth fund, compare the fees of growth funds from various providers.
Want to know what fees you might be paying?
Check out our guide to superannuation fees. View
It's important to look at both the fees and the rates of return. Sometimes, paying slightly higher fees can be worth it if the fund delivers consistently higher returns. However, remember that past returns are not an indicator of future performance.
If you’re unsure, it’s never a bad idea to consult a financial advisor for personalised advice.
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