What does Superannuation mean to me?
Tags: Saving, Investing, Superannuation

Australia’s superannuation system exists to maximize the retirement savings of Australians. According to the report by the Treasury, the system is responsible for the retirement savings of 16 million Australians, representing about $3 trillion. As superannuation plays a vital role in providing numerous, broad benefits for the Australian economy and most importantly for Australians, it is necessary to know how to make your superannuation work harder for you.

What is Australia’s superannuation system?

In Australia, superannuation, or just “super”, is compulsory for people who work and reside in Australia. The balance of a person’s superannuation account is used to provide an income stream when retiring. Federal law dictates minimum amounts that employers must contribute to the super accounts of their employees, on top of standard wages or salaries. And now, Australians are required to contribute 9.5% of their salary towards their retirement.

Superannuation savings are overseen by three regulators:

• Australian Prudential Regulation Authority (APRA) — to ensure superannuation savings are effectively managed to provide a benefit in retirement.

• Australian Securities and Investments Commission (ASIC) — to ensure superannuation funds operate efficiently, honestly and fairly.

• Australian Taxation Office (ATO) — to enforce superannuation funds’ reporting and administrative obligations and regulate self-managed superannuation funds.

How does super work for you?

Given the average Australian can expect around 20 years of retirement, the Age Pension is provided by Australian government directly and is designed to provide only the most basic needs. In this sense, the more super you can save now the more comfortable and enjoyable your retirement years will be.

Superannuation broadly has two phases that are summarized below:

1. Accumulation phase

The accumulation phase is the first stage of everyone’s superannuation life — when you are contributing to your superannuation account, or when your super balance is accumulating. All the contributions you make during the accumulation phase are ‘locked away’ (preserved) until your retirement.

Concessional contributions and fund earnings in the accumulation phase are taxed at the rate of up to 15%, which is lower than the marginal tax rate of most people. That’s why many people use super as an investment vehicle to reduce tax.

2. Retirement phase

Super funds are transferred into the retirement phase when a member commences a super income stream (or pension). Since July 2017 there has been a cap of $1.6 million that can be transferred into the retirement phase (known as the transfer balance cap).

Fund earnings on assets transferred into the retirement phase to support the pension income stream are tax-free.

Takeaways

Superannuation is an indispensable part of Australians’ income stream of retirement. Many people have a misunderstanding of Australia’s superannuation system that they consider the super to be managed by Australian Government. While, it is necessary for Australians to make super work harder for themselves by managing well the underlying investments and insurance plan, allowing them to enjoy a higher standard of living in retirement.