# Understanding Superannuation: Definition, Mechanism, and Plan Types

![Superannuation](https://www.investopedia.com/thmb/PHDB2vB4UXW4rijWrg6-sQCD6OQ=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/superannuation.asp-final-ae408ef0c0394e71b6b948007e85b9ce.jpg)

*— Investopedia / Jake Shi*

> **Definition**
>
> Superannuation is an Australian retirement savings program that’s funded by employer and employee contributions and can provide a defined benefit or accumulate value.

## What Is Superannuation?

A superannuation is a mandatory Australian retirement program provided by a company to its employees as a savings vehicle during their working years. It involves a [defined-benefit](https://www.investopedia.com/terms/d/definedbenefitpensionplan.asp) fund or accumulation fund (the latter of which is similar to a defined contribution plan in the United States). Funds deposited in a superannuation, or super, account [appreciate](https://www.investopedia.com/terms/c/capitalappreciation.asp) over time until an employee [retires](https://www.investopedia.com/terms/r/retirement-planning.asp).

### Key Takeaways

*   Superannuation, or super, is an Australian pension program created by employers for employees, akin to U.S. pension plans.
*   There are two main types of superannuation funds: defined-benefit and accumulation funds.
*   Accumulation funds grow based on contributions and market performance, while defined-benefit plans provide fixed payouts.
*   Super funds allow for investment choice and can have lower fees compared to other retirement options.
*   Australian superannuation funds are subject to specific tax conditions depending on the contributor's circumstances.

## How Superannuation Works: Employer and Employee Contributions

Superannuation funds grow through contributions from employers and sometimes employees. This monetary fund pays out employee pension benefits as participating employees become eligible. An employee is deemed to be superannuated upon reaching the proper age or as a result of infirmity. At that point, the employee can draw benefits from the fund.

Unlike other retirement plans, superannuation benefits are defined by a schedule, not investment performance.

## Exploring the Different Types of Superannuation Plans

There are two types of superannuation funds.

### Accumulation Funds

With an [accumulation](https://www.investopedia.com/terms/a/accumulation.asp) fund, employees and employers periodically contribute to the fund so that it grows over time. The funds are designed to increase by using the contributions in investment strategies to give a [return on investment](https://www.investopedia.com/terms/r/returnoninvestment.asp), allowing for larger [distributions](https://www.investopedia.com/terms/d/distribution.asp).

Accumulation funds are distributed to retirees based on the returns generated, so the more you put into the fund and the more it grows, the more you can receive in retirement.

> **Important**
>
> Superannuations are taxed differently in the U.S. and Australia. It can become complicated if you have an Australian super and are subject to U.S. tax laws. It's best to consult with a tax expert to find out your tax obligations.

### Defined Benefit Fund

Defined benefit plans are funds that make distributions based on a formula to give a guaranteed amount of income when withdrawals begin. These are similar to [annuities](https://www.investopedia.com/terms/a/annuity.asp) or [pension plans](https://www.investopedia.com/pensions-4427728) where employment length and salary history are considered.

## Key Benefits of Choosing Superannuation for Retirement Planning

Superannuation offers several key benefits:

*   **Lower fee structures**: Fees tend to run low compared to other retirement account options.
*   **Simple features**: Most supers only provide what you need and give you choices for any extra services.
*   **Investment choices**: You can pick from retail, industry, public, corporate, or self-managed super funds.
*   **They can follow you throughout your career**: A super fund can be attached to you instead of your employer so that it follows you throughout your career. These are called stapled super funds.
*   **You can access them early**: If you become incapacitated permanently, temporarily unable to work, or have a terminal medical condition, you can access your super early without penalty.
*   **Guaranteed income throughout retirement**: Super funds guarantee you won't run out of retirement funds before you die.  
    
*   **Government contributions of up to $500**: If you meet specific criteria, the government will contribute a maximum of $500 to your super fund.

## Superannuation: Insights from Employers and Employees

### Employer

A defined benefit superannuation supplies a fixed, predetermined benefit depending on various factors, but it is not dependent on market performance. Specific factors include the number of years the person was employed with the company, the employee's salary, and the exact age at which the employee begins to draw the benefit.

Employers often value these benefits for their predictability. They are more complex to manage but offer larger contributions than some U.S. [employer-sponsored plans](https://www.investopedia.com/terms/e/employer_sponsored_plan.asp).

Accumulation funds are not as predictable, but still rely on the same factors as defined benefit plans.

Employers who contribute to a super account pay a set tax rate of 15% on the contributions. If you're [self-employed](https://www.investopedia.com/terms/s/self-employed.asp), you can deduct your contributions from your taxes, but your super fund pays a 15% tax on them.

### Employee

In a defined benefit plan, upon qualifying for retirement, an eligible employee receives a fixed amount. It's typically distributed on a monthly basis. The amount is determined by a preexisting formula. In that regard, the function of a superannuation is similar to receiving [Social Security benefits](https://www.investopedia.com/terms/s/social-security-benefits.asp) upon reaching the qualifying age or under qualifying circumstances.

Accumulation funds can raise or lower payouts based on market performance. Employees should be cautious when choosing this type.

Depending on what other retirement savings vehicles the employee has, there may be other implications that require consideration to access the funds in the most tax-efficient way possible.

> **Fast Fact**
>
> Non-concessional contributions are from your after-tax income and are not taxed in a super fund. Concessional contributions are from pre-tax income and are taxed at 15% when placed in your super.

Contributions made to a super from after-tax income are not taxable. However, [capital gains](https://www.investopedia.com/terms/c/capitalgain.asp) made in the fund are taxable under certain circumstances. Everyone has a super capital gains tax cap which they can claim under their non-concessional gains.

## Comparing Superannuation with Other Retirement Plans

Superannuation guarantees a specific benefit, unlike some other retirement plans. For example, a defined benefit superannuation is not affected by individual investment choices, but U.S. retirement plans such as [401(k)](https://www.investopedia.com/terms/1/401kplan.asp)s and [Individual Retirement Accounts (IRAs)](https://www.investopedia.com/terms/i/ira.asp) can be affected by market fluctuations. In that sense, the exact benefit from an investment-based retirement plan may not be as predictable as those offered by a superannuation.

> **Fast Fact**
>
> Market fluctuations do not impact the benefits of defined-benefit funds, but the funds in the plan are typically managed by a trustee who invests those assets in a mix of equities and fixed-income securities. In that sense, there is some risk that a market downturn could impact the fund's solvency. In such cases, the plan could become underfunded, meaning there are not sufficient funds to meet future obligations.

A person on a defined-benefit plan generally will not have to be concerned with the total amount remaining in the account and is usually at low risk of running out of funds. In other investment vehicles, however, poor performance could mean a person might run out of funds before they die.

Companies must report plan funding annually to tax authorities and inform employees. In the event a plan is underfunded, a company may be required to provide additional funding to remedy the situation.

## What Do You Mean by Superannuation?

Superannuation is an Australian retirement account. There are two types: one that can appreciate over time and has variable payouts depending on market conditions, and one that has a defined benefit payout system that is not susceptible to market fluctuations.

## What Is the Difference Between Superannuation and Retirement?

Superannuation is a retirement account that Australians can use to fund their retirement. Retirement is when you have built enough wealth that you don't need to work again.

## What Is Superannuation in Salary?

Superannuation is a retirement fund offered by an employer in Australia. You and your employer contribute to this fund to help you build enough wealth to fund your retirement.

## The Bottom Line

A superannuation is a retirement savings system in Australia and a key to successful financial planning. The two types of superannuation plans are defined benefit funds, which provide a predictable income based on employment factors (like a define benefit pension plan in the U.S.), and accumulation funds, which grow in value through contributions and the performance of investments. Superannuation benefits include low fee structures, a variety of investment choices, guaranteed income throughout retirement years, and a government contribution of up to $500, if you qualify.

> **Article Sources**
>
> 1.  Australian Taxation Office. "[Super](https://www.ato.gov.au/individuals/super/)."
>     
> 2.  Australian Securities and Investments Commission. "[Accumulation Fund](https://moneysmart.gov.au/glossary/accumulation-fund)."
>     
> 3.  Australian Securities and Investment Commission. "[Defined Benefit Fund](https://moneysmart.gov.au/glossary/defined-benefit-fund)."
>     
> 4.  Australian Securites and Investments Commission. "[Types of Super Funds](https://moneysmart.gov.au/how-super-works/types-of-super-funds)."
>     
> 5.  Australian Securities and Investments Commission. "[Tax and Super](https://moneysmart.gov.au/how-super-works/tax-and-super)."
>     
> 6.  Australian Tax Office. "[Caps, Limits and Tax on Super Contributions](https://www.ato.gov.au/individuals/super/in-detail/growing-your-super/super-contributions---too-much-can-mean-extra-tax/?page=5)."