Superannuation is a pension program created by an organization for the benefit of its workforce after retirement. It is a type of investment spread over the long term. In a superannuation fund, the employer contributes a fixed amount regularly as specified by the Superannuation Guarantee Legislation.
The employer’s contributions into the superannuation fund must be equal to at least 9.5% of the employee’s salary (known as Superannuation Guarantee). The employer may also contribute to the fund, and certain eligible employers may also benefit from co-contributions from the government.
This long-term investment is maintained till retirement and can be used by individuals if they do not have a fixed source of income to rely on.
The money put into a super fund is invested for further profits. Superannuation decreases the government costs of providing a pension to the retirees. Thus, one can get tax benefits on a superannuation fund.
The contributions to super funds are made by the employer and can be made by the employee as well. These are called ‘super contributions’. Both these contributions are invested in different assets.
These investments can include anything from cash to fixed interest that offer annual returns which help grow your balance. The super funds can be accessed post the age of 65 or after the employee has retired. They can also be accessed earlier under special circumstances such as the case of a disability or a case of an urgent need of a large amount of funds.
Most superannuation funds can be managed by the employees themselves or by a third-party expert. When the employees choose to set up their own savings fund, it is known as self-managed super funds or SMSF. An employer can open an SMSF with up to three other employees and can manage these funds alone.
In case an employee changes a company, he or she can simply transfer the superannuation fund onto the new employer.
Five authorities manage super funds in Australia. These include:
Super funds can be of two types, which are:
Super funds can belong to retail, industry, corporate funds, or self-managed funds.
Superannuation funds are lightly taxed, which give them an edge over other forms of retirement benefits. This means greater returns post retirement than the returns earned from other retirement schemes available.
The before-tax contributions are taxed at 15% if the annual income of the employee is under $300,000. The contributions made with after tax money are not taxed. Also, the returns from an investment of super funds are taxed at 15%, if the annual income is under $300,000, and at 30% otherwise.
The benefits from superannuation can be received in a lump sum amount or through a fixed stream of income depending on the contributor.
The knowledge of superannuation amount upfront can help member take full advantage of the funds by planning out retirement in a better way.
A superfund and pension fund are very much alike. A pension fund can be considered an example of a defined benefit fund, which is a type of superannuation fund. However, the fundamental difference between the two is that super funds are maintained while an individual is employed while a retirement fund is only meaningful post retirement.
Thus, a pension is established by a retired individual by transferring some, or all, his money into it upon reaching preservation age. In comparison, a super fund is a long-term investment made when the individual is still employed.
The benefits from a pension fund are paid in the form of a fixed stream of income. They are taxed at the same rate as super funds, which is 15%.