Superannuation: Everything you need to know about saving for retirement

Quick facts:

• Superannuation, sometimes just called "super", is designed to help you save for retirement.
  
• Your super money is built up through contributions made by your employer(s) over the span of your working career, paid as part of your salary.
  
• There are a lot of super funds to choose from and different types of accounts.
  
• It’s important to compare funds to ensure you are maximising your retirement savings.
  
• Things to consider when choosing a fund include performance, fees, insurance and investment options.
  
• Access to your superannuation differs based on your ‘preservation’ age and sometimes your working circumstances.

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 stop working. 

This amount can grow over time, based on how much is contributed and how your chosen fund invests your money. The idea is that these accumulated savings will help you pay for and enjoy your retirement years.  

In Australia, employers are legally obligated to contribute a fixed percentage of your salary directly into your super fund. This is known as the ‘super guarantee’ and is the minimum amount employers must pay into each employee’s super account. 

As of July 2023, the rate is 11% of ordinary times earnings (OTE). In 2022, some changes were made to the guarantee to broaden eligibility, which you can read more about on the Australian Taxation Office’s guide for getting your super started. 

This super system was put in place to support Aussies in their post-work years. Traditionally, the retirement age in Australia has been 65, however this can vary depending on when you were born. It can also vary depending on your working circumstances. 

For example, some people retire early due to a medical condition or financial hardship, and in those instances early access to super may be allowed. You can check the government site Moneysmart for some of the rules around this.

For some, the golden years might be a while off, so why even worry about super? 

Even though retirement may seem distant, it's important to start saving now and make sure the money you put into your superannuation account gets you the best return, as this will mean more money for you to enjoy (and live on) in retirement.  

Fortunately, your super savings start accruing as soon as you get that first work paycheck (though the rules vary on this based on your age and the type of business you work for). 

There are two types of contributions that can be made to superannuation. 

• Compulsory. These are the contributions made by your employer on your behalf.
  
• Voluntary. These are contributions that you can make above the minimum employer contributions.

Let’s break down each category and what they mean for your retirement savings.

Compulsory super contributions

As mentioned, the super guarantee ensures you have at least some money put away once you stop earning an income.

The Australian Taxation Office (ATO) specifies this ‘minimum’ amount paid by employers must be equal to 11% of ordinary time earnings (OTE). This is scheduled to increase to 12% by 2025 progressively. This compulsory payment is paid at least quarterly.

There have also been changes to eligibility requirements for super contributions. For example, according to the ATO, from July 2022 an employer must contribute to your super regardless of how much you are paid per month if you are over 18 years old. And this will apply whether you work casual, part-time, or full-time hours, and if you are a temporary resident. 

You may also be eligible if you are a contractor who is paid primarily for labour – even if you have an Australian Business Number. For those under 18, you will need to work more than 30 hours a week to be eligible. 

In summary, your employer will need to pay you super guarantee contributions, forming part of your salary and benefits whenever you start a new job. Contributions can be taxed and this generally depends on whether they were made before or after you paid income tax, you exceed the super contribution caps or you are a high-income earner. 

Note: it’s always a good idea to consult a tax professional on all this.

Voluntary super contributions and caps

The other way to increase your super is  to make your own voluntary contributions to boost the money in your account. This can be done in the form of a ‘salary sacrifice’ to your super using pre-tax funds or making contributions using post-tax funds. 

Keep in mind, however, the amount you can contribute to your super each fiscal year without incurring additional tax is subject to limits or caps. The ATO encourages consultation with a qualified expert for guidance if you want to contribute more than $27,500 to your super (including employer payments).

Now you might imagine a big pot of gold at the end of the retirement rainbow, but that’s not quite how it works. You’ll need to pick a super fund and it’s a good idea to research the best ones available. 

Every fund is different: some have excellent returns on their investments, while others can be average. Some have high fees, while others have very low fees. And some might meet a range of ethical or sustainable standards that are important to you, while others might fail to meet those expectations. 

This is why research is paramount. Comparing super funds and choosing the right one for you will make all the difference down the line. We will get into performance and fees in the next section.

Keep in mind that it’s also likely you’ll change jobs multiple times over the course of your working life, so your super fund might change multiple times too. This is especially so if you don’t tell your employer which fund you’d like to go with. 

Upon starting a new job, your employer will give you a ‘standard choice form’ and this is where you’ll specify your preferred super option.

There are a few different types of super funds to choose from. These include:

• MySuper. Default funds system if you can’t or haven’t chosen a nominal fund.
  
• Retail fund. Run by banks or investment companies to make profit.
  
• Industry fund. Run by the profit-for-members organisation, and aren’t subject to shareholders.
  
• Public sector fund. This fund is for Australian government employees only.
  
• Corporate fund. Run by large corporations only for their employees.
  
• Self-managed fund. This is a private super fund, run by individuals for themselves, by themselves.
  
• Defined benefit fund. The benefits of this fund don’t depend solely on contributions and earnings. Your benefit may depend on other factors, such as your years of service or final average salary (on retirement or termination of employment).

Now the rubber meets the road! The task of choosing your super might seem daunting, but it’s well worth it in the end. 

How a fund invests will dictate how much of a return you might get, while at the same time the fees it charges will impact how much eventually sits in your account.

A lot of funds also have several fees, not just one, including administrative fees, investment fees, transaction fees, and even fees for switching accounts. So, having one super account means you can minimise all these costs – and you can choose a fund with lower fees at that. 

There are some funds that charge less than 1% in fees, depending on your balance. These are well worth looking into to compare how they stack up.

If you are ready to choose your super fund the most important things to keep in mind are: 

• Performance. Compare how well different super funds perform, however, keep in mind that past performance isn't an indicator of future performance.
  
• Fees. This is a dollar or percentage amount charged to members for the costs of managing the fund. Look for a fund that offers low fees, although keep in mind, this won’t guarantee you better returns.
  
• Investment strategy. Make sure the options suit your investment needs. Investment options include ‘growth’, which come with some risk but can result in high returns; ‘balanced’, which are a little more conservative and typically offer average returns; ‘conservative,’ which are low risk and therefore usually produce lower returns; and ‘cash’, which insure there are no losses on your capital because investments are made with deposit-taking institutions.
  
• Complementary insurance. Most super funds automatically provide different kinds of life insurance coverage, such as life cover, income protection insurance, and/or total & permanent disability (TPD insurance) once you either reach a certain age or a certain threshold in your super*. Each of these kinds of policies can be useful financial safeguards for you and your family in the event of your death or if you can’t work anymore. In fact, getting coverage through your super can be a great way to nab a cheaper life insurance policy, though there are pros and cons.
  

*Recent changes to the law mean life insurance is no longer automatically provided to new super fund members aged under 25, unless the member works in a dangerous job. Also, life insurance is no longer automatically provided to new super fund members with balances under $6,000. 

If you’re looking for a fund, the ATO has a YourSuper comparison tool. This provides a starting point to help you choose a super fund that matches your needs.

If you want to get an idea of how much of your nest egg will be in your fund at different stages of your life, take a look at the table below. This tracks how much money your employer automatically sets aside during your lifetime.

Note: The information below is based on calculations with basic super contributions from the employer, using an average full-time salary of $68,151 per year and not considering any previous or voluntary contributions, nor any changes in the employer contribution percentage.

Example of superannuation balance over a typical working life

Your super is your money, although you can’t access it early unless there are extenuating circumstances that meet the ATO criteria.

According to the ATO, you can only access your super early for the following reasons: 

• Compassionate grounds
• Severe financial hardship
• Terminal medical condition
• Temporary incapacity
• Permanent incapacity
• Super less than $200
• First home super saver scheme

The ATO has individual instructions on how and where to apply for withdrawing and using super funds before retirement.