How the Australian Superannuation System Works
Superannuation is an Australian system that allows employees to save a portion of their income for retirement. In short, it is money set aside by your employer when you’re working, to support you when you retire. The term “super” is more commonly used when referring to this system.
How does superannuation work?
- Once you get a job, in the onboarding process you will be required to choose a super fund to place your super in. If you don’t have one, most, if not all companies will have a default super fund where they sign up all their employees.
- When you choose a super fund, your employer needs to contribute a minimum of 11% of your pre-tax income every pay cycle (2023 rates). This percentage would increase each financial year by 0.5% until 2025 where it will reach 12%. Funds deposited in a super account will grow through appreciation and contributions until retirement.
- You also have insurance cover for your super, which the super fund will provide. Most will receive a basic cover that will provide a basic level of protection, such as if you die or become ill or injured.
Note: Insurance will not be provided if you’re a new super fund member under the age of 25, or your account balance is less than $6000 unless you:
- Contact your fund to request insurance through your super; or
- Work in a dangerous job and your fund chooses to give you automatic cover (you can cancel this cover if you don’t want it).
Types of super fundsIndustry super fund vs retail super fund An industry super fund (ISF) puts member’s benefits first, and not the interests of external stakeholders. There are a variety of different ISF, look out for this logo to know whether your super fund is an ISF. You can join any ISF, but some super funds are better suited to particular professions and industries, such as CBUS for the construction industry and HESTA for health and community services. Some of the biggest industry super funds include:
- Aware Super
- Rest Super
- Australian Retirement Trust
- AMP superannuation
- BT superannuation
- Colonial First State superannuation
- MLC superannuation (IOOF Holdings)
- OnePath superannuation (IOOF Holdings)
What is the financial benefit of superannuation for Australians and foreigners
Australians, having super has many benefits and advantages:
- Superannuation will help fund your retirement, when you’re no longer working and earning an income. According to the latest retirement standard, you’d need a super balance of $545,000 (or $640,000 for a couple) to live a comfortable retirement.
- Super is paid by your employer and not by you. For most workers your employer is legally required to pay you super on top of your annual income. Which means you don’t need to worry about managing it and nothing is coming out of your pocket.
- Your money could compound from growth. When money is added into your super account, it will also be invested into various avenues depending on the fund. Investment returns are reinvested into the fund and in that way your personal super will grow overtime.
For international students or working holiday visa holders, you may still be entitled to super. In order to qualify, you will need a tax file number (TFN). The advantages of having super as a foreigner include:
- You will be able to take it back home with you. You can claim Depart Australia Superannuation Payment (DASP) once you have left Australia and your visa has expired.
- If you choose to stay in Australia, you will reap the same benefits as an Australian resident. And your super will continue accumulating over the years you choose to work in Australia.
Note: If you are a business owner and have an Australian Business Number (ABN), contributions to your super will be your responsibility along with setting up an account.
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