When people think of retirement, they often think of relaxing days travelling around, playing golf, spending time socialising with friends and family, working on projects around the house and garden, etc.
In contrast, I doubt that many people in Australia count down the days to retirement so they can live out their remaining years on the Aged Pension. This is where superannuation plays a major role.
Although answering the question ‘what is superannuation’ is not easy, and lawyers, politicians, financial advisers, etc might provide different definitions of superannuation, it is fundamentally a scheme designed to allow people to save for their retirement. It is arguably the easiest way to save for retirement, and possible the most tax-effective way to do so.
Most Australian workers have an active superannuation fund. This is not necessarily the case for all workers, including many self-employed workers or workers who earn less than a certain amount each month.
"...the law mandates that the employer contributes money to the employee’s chosen superannuation fund."
In a situation involving an employee-employer relationship, the law mandates that the employer contributes money to the employee’s chosen superannuation fund. The exception is if you are a worker over 18 years and earning less than $450 (before tax) each month or you’re under 18 years and work less than 30 hours per week and earn less than $450 per month.
This payment is referred to as Superannuation Guarantee contributions.
The present rate for these superannuation contributions is 9.5% of the employee’s pre-tax salary (this rate should continue to gradually increase in years to come). This means that presently, an employee earning a salary of $50,000 per year should have $4,750 worth of superannuation contributions made each year by their employer.
Over the space of decades of employment, this annual superannuation contribution will continue to accumulate, and then provide a decent sum of money to live off from the date of retirement. If the final amount of superannuation is less than a prescribed amount, then the individual may still be eligible to receive the Aged Pension (either in full or partial) in addition to receiving their superannuation funds.
Many employees also choose to make additional contributions to their superannuation fund during their working life. This not only has benefits by increasing the final amount in the superannuation fund at the time of retirement, but it also has some tax benefits.
Employees who ‘sacrifice’ some of their salary into their super fund will reduce their liability in relation to the amount of income tax they pay. This can be complicated, and if you’re considering ‘salary sacrificing’ into your superannuation fund you should seek independent financial advice.
Superannuation did not just come about overnight, but it was a carefully considered and revolutionary legislative policy implemented by the Federal Labor Government in the early 1990’s to encourage savings for retirement, leading to less reliance on the social security system.
"This has become incredibly important, particularly as Australians are living longer."
This has become incredibly important, particularly as Australians are living longer. Decades ago, workers could retire at 60 years of age but were only expected to live another decade or so. These days, workers retire in their mid-sixties but might live in excess of 90 years old. This might lead to several decades in receipt of the Aged Pension, and this would place an extreme strain on the social security system.
As good as superannuation has been for Australian society, in its early days it was quite unpopular. Throughout the 1980’s, before superannuation guarantee (compulsory employer superannuation contributions) came into effect in the early 1990’s, if an employer made a contribution towards retirement savings, this was considered a luxury for a small percentage of lucky workers.
So, as complicated as superannuation has become (including large volumes of legislation with regular amendments and Parliamentary debate), it is really nothing more than a long-term savings plan.
Another huge benefit of superannuation is that the amount of money in the fund can be invested in a variety of different ways in an attempt to grow the overall amount. The amount in the fund grows as a result of the contributions made and the interest earned on the investments, which is often ‘compounded’. This effectively means that as you earn interest, further interest then accumulates on that amount of interest. This sounds confusing but it results in the potential strong growth of the super funds.