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Pay and perks or good earnings in businesses are an important part of Australians’ lives. These sources of income help them meet not only the basic needs of life, like paying bills for essentials and tuition fees for children, but also maintain a quality lifestyle.
However, once they retire or reach old age, and their sources of income dwindle, many Australians are left with only an old-age pension, which is barely enough to meet their basic needs.
Suddenly, they find themselves unable to bear the same expenses or, enjoy the same lifestyle they used too before their retirement. The importance of Superannuation or Super comes to the fore in such a backdrop.
What is Superannuation?
Superannuation is the money that an employer contributes to the super fund of an employee before the latter reaches retirement age, or a self-employed person contributes to their Super fund. This contribution is known as the Superannuation Guarantee (SG).
While it is the employer who is legally bound to pay one Super, one can also add their money to earn more income after retirement. As per the Australian income tax department rules, one can withdraw Super only at the time of retirement or reaching the age of 65.
However, there are extraordinary circumstances like severe financial hardships or specific medical conditions when one can withdraw money before retirement also.
From 2013-14, people aged 70 and above who are still employed are also eligible for Super.
If you are self-employed, Super is entirely voluntary. The more money you put in, the more you get after 65.
Employees under 18 or those categorised as private and domestic workers can also avail Super provided they work for more than 30 hours a week for their employers.
How Superannuation works
Under the SG program, an employer is legally bound to contribute 10.5% of an employee’s gross income, including commissions, loadings, and bonuses, to the latter’s Super fund. Employers have to contribute this money on top of an employee's salary and wages.
The rate was increased from 10% to 10.5% in July this year. SG is due to increase its percentage by 0.5% every year until it reaches 12% in 2025-2026.
It is important to know that the maximum amount an employer can contribute to the SG of a high-capped earner is capped at an annual salary of $240,880 (in 2022-23), which amounts to annual SG payment of $25,292 ($240,880 X 10.5%).
Super, which became compulsory in 1992 and saw the percentage rising from 3% to 9% in July 2002 is, thus, expected to remain extremely popular among Australians.
For many Australians, it is the second-biggest asset they own after their home.
Phases of superannuation
Super has two phases mentioned below:
Accumulation phase
This is the first stage of Super when an employer, or self-employed, contributes to the Super account. The stage is called the accumulation phase as an individual’s amount accumulates during this period. During the accumulation phase, all contributions, including investment earnings on them, are preserved or locked away until one’s retirement.
In the accumulation phase, fund earnings and concessional (before tax) contributions are taxed at 15% (up to the concessional contribution cap).
Retirement phase
Once the amount is accumulated in a Super fund, it is transferred into the retirement phase when one starts getting super income (pension). Before retirement, one can transfer an amount (called the transfer balance cap) into their super fund up to the limit of AU$1.7 million, which was AU$1.6 million before 1 July 2022. On the other hand, one has to contribute a minimum of AU$500 a month in the accumulation phase to be eligible for a pension in their retirement phase.
If one transfers assets into the retirement phase to support the pension amount, the fund earnings on such assets are tax-free.
What will your employer do once you start a job?
When you join a company, you can tell your employer to pay SG contributions to the Super fund of your choice. The employer is required to contribute to your fund at least four times a year on a quarterly basis. If you don’t tell the employer about the super fund of your choice, the employer should check the amount your previous employer was contributing to your Super fund. This process is known as Stapling.
According to the Stapling rule, the Super fund of an employee will follow them from job to job, and the employee’s contribution will be paid to that Super fund unless the employee signs up for another Super fund.
Can one check if their employer is paying the correct percentage of Super?
If an employee is eligible for a Super fund, they should get the superannuation standard choice form within 28 days of their first day in the company. The employee has to give consent in writing. There are online tools available to estimate the amount one is eligible to get in their Super fund. Once these formalities are done and the employer starts contributing to one’s Super fund, it is advisable for them to ask certain questions from their employer -
- How much is it paying?
- How often it is paying your Super
- Which fund it is paying into
If you think your employer is not paying the correct amount, you can check your last Member statement from your Super fund, or you can contact the fund to know the amount your employer has contributed to your account.
If it is below your entitled limit, you can contact the Australian taxation office’s helpline 131020 to bring it to its notice.
What happens to your Super fund
Money received in your super fund is invested in a default strategy or investment options selected when completing a super fund form. The options one can choose include a range of asset classes which offer different rates of growth and risk.
One also has the option to transfer their money into another Super fund or into a different investment option within their Super fund.
At present, there are many online tools available to keep a tab on your Super fund amount. It is highly advisable that one keeps checking the amount at least once in three months to make sure that their employer is contributing the right amount of money to their Super fund.
