Superannuation (or more commonly known as ‘super’ in Australia) is money that is set aside and managed by a super fund. The super fund invests the money for an individual until they retire (if you were born after 1 July 1964, that age is 60). The idea is, by the time the individual retires, they will have enough money to support themselves for the rest of their life, rather than relying on a pension from the government.
What is a super fund?
The role of the super fund is to carefully choose how the money is invested. Saving money for retirement is a marathon, not a sprint, meaning super fund managers try to find investments to allow the money to grow over a long period of time. Super fund managers can invest in almost anything (cryptocurrency, property, and shares – even infrastructure like airports).
There are two main types of super funds:
- Industry super fund
These types of super funds are designed for specific industries. For example, there are specific super funds for those in the health (HESTA) and education (UniSuper) industries. Industry funds are mostly not-for-profit funds, meaning that all profits go towards members of the fund. Originally, they were developed by trade unions and industry bodies to provide for their members in retirement. Many of these funds are now open for anyone to use, regardless of the individual’s industry. Generally speaking, industry super funds have lower fees than retail super funds.
- Retail super fund
Retail super funds are typically run by banks (Commonwealth Bank) or financial institutions (AMP) that are typically for-profit, meaning the super fund keeps some of the profits made. Membership is open to anyone, regardless of the individual’s industry. Generally speaking, retail super funds have higher fees than industry super funds.
Where did superannuation in Australia come from?
In 1992, compulsory superannuation was introduced under the Keating government.
How does it work?
Employers, by law, are required to contribute to employees’ super funds in addition to the employee’s salary. It’s known as the ‘superannuation guarantee’, and is currently 10 percent of an employee’s salary, as of July 2021 (previously 9.5 percent). Over time, the superannuation guarantee will increase to 12 percent by 2027.
Individuals also can add into their super on top of their employer’s contributions, and there are sometimes government incentives to do so.