A superannuation is an Australian pension program created by a company to benefit its employees. Funds deposited in a superannuation account will grow through appreciation and contributions until retirement or withdrawal.
Key Insights
- Australian superannuation funds are more commonly referred to as super funds.
- There are two types of superannuation funds: defined-benefit funds and accumulation funds.
- Accumulation fund distributions and total value are subject to market fluctuations.
- Defined-benefit plans are not subject to market fluctuations but can be mismanaged and run out of funding.
- Both types of super funds have specific taxable conditions depending on the contribution and contributor’s circumstances.
Understanding Superannuation
As funds are added by employer (and potentially employee) contributions and other traditional growth vehicles, the funds are reserved in a superannuation fund. This monetary fund pays out employee pension benefits as participating employees become eligible. An employee is deemed to be superannuated upon reaching the proper age or as a result of infirmity. At that point, the employee can draw benefits from the fund.
A superannuation fund differs from some other retirement investment mechanisms in that the benefit available to an eligible employee is defined by a set schedule and not by the performance of the investment.
Types of Superannuation Plans
There are two types of superannuation funds, called super funds in Australia.
Accumulation Funds
An accumulation fund grows over time through periodic contributions from both employees and employers. These funds use investment strategies to increase in value, allowing for larger distributions upon retirement.
Accumulation funds’ payouts depend on the returns generated. The more contributed to the fund and the more it grows, the more can be received in retirement. It’s crucial to consult a tax expert regarding tax obligations, especially if you have an Australian super and are subject to U.S. tax laws.
Defined Benefit Fund
Defined benefit plans distribute based on a formula that guarantees a specific income amount when withdrawals begin. Factors like employment length and salary history are considered, making these plans similar to annuities or traditional pension plans.
Benefits of Superannuation
Superannuation offers various benefits, including:
- Lower fee structures: Generally, fees are lower compared to other retirement accounts.
- Simple features: Supers often provide essential features without unnecessary extras, though additional services can be chosen.
- Investment choices: Supers allow selection of different investment types such as retail, industry, public, corporate, or self-managed super funds.
- Career-long portability: Stapled super funds follow you throughout your career, rather than being tied to your employer.
- Early access under specific conditions: Incapacitation, inability to work temporarily, or terminal medical conditions can grant early access to your super without penalties.
- Guaranteed income: Super funds provide the assurance of not running out of retirement funds before death.
- Government contributions: Meeting certain criteria can result in government contributions of up to $500 to your super fund.
Superannuation From the Employer and Employee Perspective
Employer
A defined benefit superannuation offers a fixed, predetermined benefit based on factors such as years of employment, salary, and retirement age, regardless of market performance. This predictability can be appealing to employers despite the complexity of administration and the larger contributions required compared to some U.S. employer-sponsored plans.
Employers pay a 15% tax on contributions to a super account. Self-employed individuals can deduct their contributions from taxes, but the super fund still incurs a 15% tax on them.
Employee
Upon retirement, an eligible employee typically receives a fixed amount monthly (in a defined benefit plan), determined by a predefined formula. This is similar to receiving Social Security benefits in the U.S.
Accumulation funds can increase or decrease payouts depending on market performance. Employees should carefully consider this option. Different retirement savings may have tax and other implications that need careful planning.
Contributions to a super from after-tax income aren’t taxable. However, capital gains in the fund might be taxable under specific conditions, but they can also benefit from a capital gains tax cap.
Superannuation vs. Other Plans
While superannuation guarantees a specific benefit once the employee qualifies, other traditional retirement vehicles may not. For example, a defined benefit superannuation is unaffected by individual investment choices, unlike U.S. retirement plans such as the 401(k) or IRA, which can fluctuate with the market.
Market fluctuations do not impact defined benefit funds’ payouts, but a trustee manages investments, which could affect fund solvency in prolonged market downturns. Defined benefit plan participants generally avoid concerns over account depletion, unlike other investment vehicles.
Companies need to report the plan’s funding status annually to tax authorities and employees. Underfunding may require additional company contributions to bridge resource gaps.
What Do You Mean by Superannuation?
Superannuation in Australia involves two primary types: one with variable payouts subject to market conditions and another with guaranteed payouts unaffected by market fluctuations.
What Is the Difference Between Superannuation and Retirement?
Superannuation is a specific retirement account Australians use to save for retirement. Retirement, in general, refers to ceasing to work after building sufficient wealth.
What Is Superannuation in Salary?
Superannuation is a retirement fund to which you and your employer contribute, aimed at helping you build sufficient wealth for retirement.
The Bottom Line
A superannuation is an employer-sponsored retirement account widely used in Australia, akin to U.S. annuities or defined benefit plans. It can be a fixed benefit fund based on employment length and salary or an accumulation fund influenced by contributions and market performance.
Related Terms: pension, retirement plan, 401(k), IRA, defined-benefit plan, defined-contribution plan.
References
- Australian Taxation Office. “Super”.
- Australian Securities and Investments Commission. “Accumulation Fund”.
- Australian Securities and Investment Commission. “Defined Benefit Fund”.
- Australian Securites and Investments Commission. “Types of Super Funds”.
- Australian Tax Office. “Super Co-Contribution”.
- Australian Securities and Investments Commission. “Tax and Super”.
- Australian Tax Office. “Non-Concessional Contributions and Contribution Caps”.
- Australian Tax Office. “Concessional Contributions and Contribution Caps”.
