How Does Superannuation Work in Australia?

  • Troy BurnsTroy Burns
  • Updated Dec 19, 2022

  • Mate Checked

    This information has been reviewed by our SMSF Mates before it was published as part of our review process.

Unsure about what your superannuation is and how it works? At SMSF Mate we cover everything from the basics right up to the most advanced concepts you need to know about your superannuation.

What is Super - SMSF Mate

What does superannuation mean for you?

In a nutshell, superannuation is the primary way that most people save for their retirement. Payments are made to your super by your employer under the Super Guarantee (SG) scheme of 9.5% of your base salary, and you can also make contributions on your own to top it up. 

There is also a co-contribution scheme and a low-income super contribution scheme put in place by the government to help low-income earners boost their super savings. 

Once the cash is in the tin, so to speak, the funds in your super account are then invested in the market. You are given the option to choose how your funds are invested or if it’s all too hard, the super fund will decide for you. 

The underlying objective here is that when you retire, you can access your superannuation and live off the money saved, rather than relying solely on welfare payments to support your lifestyle.

Super is a way of the government promoting self-sufficiency, and as such, tax incentives can often apply to super guarantee contributions and other contributions.

There are many rules and regulations with your super, so this article seeks to provide as much insight as possible about all of the ins and outs.

What does superannuation mean for Australians?

When the government first created superannuation, their motivation was to help people save to provide themselves with a better retirement income. People put money aside throughout their working lives and then draw down on the savings when they are no longer working. 

Your employer pays superannuation into a super account of your choosing. Your employer is required to pay you at least 9.5% of your ordinary time earnings or base salary into this super fund. When we say ordinary time earnings, we are referring to ordinary working hour earnings, which does not include overtime, commissions and bonuses.

When it is all said and done, superannuation is as simple as saving a percentage of your income while you are working, investing it in the market and then drawing down on the balance when you are old enough.

Some extenuating circumstances permitting you can draw down on your super early, but otherwise, you have to wait until your retirement age.

Is it compulsory to have a super fund in Australia?

It’s somewhat cut and dry; you are required to be paid super by law if you’re an Australian employee and you meet the minimum requirements. 

Working as a casual, part-time, full-time or contractor, you are entitled to be paid super, and the same thing goes for even if you are not an Australian citizen. 

When can you access your super?

Your super is only accessible once you reach a certain age, which is called the preservation age. It is essentially an age restriction which prevents you from accessing your super before retirement unless a condition of release is met and is largely based on when you were born.

Date of birth        Preservation age

Before 1st July 1960 55

1st July 1960 – 30th June 1961 56

1st July 1961 – 30th June 1962 57

1st July 1962 – 30th June 1963 58

1st July 1963 – 30th June 1964 59

From 1 July 1964 60

There are a few exceptional circumstances that allow you to access your super early, which include:

  • Financial hardship
  • A terminal medical illness
  • Incapacity

We’ve written an article around the rules in accessing your super which you can check out here.

Your super fund is a tax-effective entity

One thing that is commonly forgotten is that your super fund is really just a tax-effective entity or structure to hold your investments (usually, it’s a combination of shares, property, cash and fixed income products). If you were to hold these same investments outside of your super fund, the tax rate on the earnings would be very different and less attractive comparatively. By paying less tax, you are earning more within the super fund and experiencing a greater compound rate of return. We’ll give you an example, the money received in your super fund is taxed at 15%. 

Also, let’s not forget that the earnings within your super fund are taxed at 15%, which when compared to your marginal tax rate (which can be as high as 45%), you can see how this is a tax-effective entity

Your super fund can offer cost-effective insurance

It is common for super funds to offer customers the various insurance options, including life insurance, income protection and total and permanent disability insurance. The cost of the insurance is very competitive within the super fund, and you do not have to pay for it out of your own pocket. Like anything, there are some pros and cons to having life insurance in your super which include things like: 

  • Reduces your retirement balance
  • Life insurance coverage can be quite low
  • Some insurance types are not always available (trauma insurance)
  • Cover can end after a period of time 

Understanding your super fund is important

It’s important to take the time to understand things to matter to you, especially the financial things. Unfortunately, awareness about super in Australia still has some room for improvement. Most Australian employees make no effort to understand how their retirement savings are invested. A common issue is when employees have multiple super funds from previous jobs. This is an issue because you are paying fees on each super account when you don’t need to. It’s very easy to consolidate your super into one super fund, and we have explained the simple steps in our how-to guide here. 

General Advice Warning

Troy Burns

Non-Correlated Capital

Troy has more than 15 years investment and fund management experience, including management of hedge funds and multi-strategy funds. Troy has raised and managed over 300 million dollars in investments and has engaged and serviced over 150 high-net-worth clients for Non-Correlated Capital, the investment company which he serves as CEO and Portfolio Manager. Based out of Perth, Western Australia, Troy is one of the founders of SMSF Mate.

Troy’s educational qualifications include a Masters of Business Administration, Masters of Applied Finance, and Advanced Diploma, Financial Markets, completed at Charles Sturt University. Troy has also previously worked as a derivatives trader and the managing director of a civil engineering company.

You can find out more about Troy or connect with him on Linkedin here:

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Kind words from Aussies managing
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  • SMSF Mate is a unique website because it has ideas about how to approach SMSFs, insurance and other financial topics that come straight from first hand experience. It's much more useful than what you find on all the other financial websites that just offer generic info that you could easily get on the ATO's website. It's also nice to know there's no financial incentive behind the information, it's legitimately there to help people understand self-managed super funds and how to get the most out of them, not to get an affiliate commission from a broker or other financial services provider. The investment product information is also incredibly useful, I've never seen this kind of functionality on any other website that let's you look at such a wide range of products, sort by what info is most interesting or important to you, and subscribe to updates for different funds and financial products all in one place. Definitely worth checking out if you own or are considering an SMSF!

    David G, Self-Employed, SMSF Owner
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