Superannuation can be one of an individual’s biggest assets. Put simply, it is the money you put aside which you can access when you retire from working. It is mainly made up of contributions you and your employer make which is (in most cases) is invested into the stock market to accumulate over time.
For most individuals, their superannuation fund represents a significant portion of their financial assets. It is important to understand the different types of funds and how to make the most out of yours.
Types of Superannuation Funds
- Retail: Retail super funds are usually operated by banks or investment companies which anyone can join. They offer a limited range of investment options and tend to have lower costs than other types of funds due to their limited investment options.
- Industry: Industry super funds are funds designed to cater to members of a specific industry. However, most industry super funds are available to the public and offer limited investments similar to a retail super fund.
- Wrap: Wrap platforms are a lot more flexible and allow individuals to invest in managed funds and direct shares unlike industry and retail funds. This platform tends to be a bit more expensive as it offers greater flexibility to invest.
- Self-managed Super Funds (SMSF): A self-managed super fund is a private super fund you manage yourself. In an SMSF, you choose the investments and insurance and run every aspect of the fund yourself. While having control over your super can be appealing, it is a lot of work and comes with risk. To see if it’s right for you, read this
Accumulation vs Defined Benefit Fund
Accumulation Accounts:
- They are called ‘accumulation’ funds because your money grows or ‘accumulates’ over
- The value of your super depends on the money that you and your employers put in (known as super contributions), and on the investment return generated by the fund.
- Most Australians are in an accumulation fund.
Defined Benefit:
- Defined benefit funds are less common than accumulation funds.
- Most defined benefit funds are corporate or public sector funds, and many are now closed to new members.
- Typically your benefit is calculated using the money put in by you and your employer, your average salary over the last few years before you retire and the number of years you worked for your employer
Super Contributions
There are two basic types of super contributions you can make.
Concessional contributions are made from before-tax income and are taxed at 15% in your super fund. There are several types of concessional (before-tax) contributions, but the two most common ones are:
- Superannuation Guarantee (SG) contributions: the compulsory contributions made by your employer into your super account on your behalf as part of your pay. In 2021/202, the SG is 10% of your ordinary time earnings (OTE), but this is set to rise slowly to 12% by 1 July 2025.
- Salary sacrifice contributions: an agreement you make with your employer to pay part of your before-tax salary directly into your super account. Making salary sacrifice contributions can be a good way of minimizing tax, as it is taxed at a lower rate than what you most likely pay on your income.
Non-concessional contributions are made from after-tax income and are not taxed in your super fund. There are two main types of non-concessional (after-tax) contributions:
- Personal contributions are contributions you make as a super fund member and don’t claim as a tax deduction in your income tax return. These are often called ‘voluntary’ contributions and can be either a large lump sum or small regular amounts from your wages or salary.
- Spouse contributions are made directly into your spouse’s super account. This can be a tax-effective way for a couple to save for retirement if one partner is only working part-time or has a low income.
For a detailed description of these contributions, click here.
Beneficiaries
To make sure that your super fund knows who to distribute your super savings to after you die, it is important to nominate a beneficiary.
Generally, your beneficiary must be a ‘dependent’, which can mean either your spouse, any children, or any person who is financially dependent on you at the time of your death. It is best to be in contact with your super fund to get a clear definition of their beneficiary terms.
Beneficiary nominations can be either:
- Binding: legally instructs the superfund to pay out your money as your request
- Lapsing: the nomination remains in effect for three years from the date last confirmed
- Non-lapsing: the nomination will not expire
- Non-binding: gives the superfund an indication of your preferences without being legally binding and gives the superfund discretion to protect the interests of your beneficiaries if circumstances change
Considerations
If you decide it is important to build your super, some actions can make a big difference over time.
These include:
- consolidating your super into one account so you pay fewer fees
- making extra contributions to grow your super
- changing your super investment options
What happens when you retire?
Once you meet a condition of release, you have the ability to open a pension account.
If you’ve reached your preservation age and you’re still working, a transition to retirement pension may suit you. If you are no longer working and require an income stream, an account-based pension may be of benefit.
To read about what to do with your super when you reach retirement, click here.