Superannuation is money that you save during your working life to use as income when you retire.

Like any other investment, the intent is to increase your super account balance, over the long term, while you’re still working. Once you’ve reached retirement, your super savings are generally converted into a pension, providing a regular income for you to live on.

Understanding how superannuation works in Australia, will help you ensure your money’s being managed the way you want it to.

How superannuation works in Australia

If you work in Australia in any capacity, you must be paid super by your employer. This is paid on top of your annual salary known as the Super Guarantee (SG). This includes many people who may consider themselves self-employed but are employed by their own company or trust.

Currently, your employer must contribute 10.5% of your salary into super. This rate will continue to increase every year until it reaches 12% in 2025.

Your Future, Your Super

The Federal Government has also introduced a new set of reforms which will see your super follow you from job to job. This means when you start a new job, your employer will be required to pay super into your existing ‘stapled’ fund, if you don’t nominate a new one.

How your super is invested

Many of the principles of investing in super are the same as investing outside of super. The main difference is how your investments are taxed: you pay less tax on investment earnings inside super.

If you are a member of an industry, retail, corporate or public sector fund, your money is combined with other peoples’ super to buy investments. This enables your super to grow in two ways:

  • growth in resale value called capital growth

  • reinvested income such as rent or dividends.

If you don’t actively choose how you want your money invested when you join a fund, you will be placed in a default investment option. These are designed to cater for a large group of people, based on specific investment criteria that the fund must deliver to. Normally, these options have around 60-80% of their funds invested in growth assets such as shares and property.

It’s important to regularly assess how your super’s invested and make changes if necessary. For example, taking a more conservative approach, means you’ll have higher exposure to cash and fixed-income assets as they offer less risk than shares and property.

What are the main types of super funds?

Superannuation funds can be broken down into five different types: 

Corporate/employer-sponsored super funds

Some medium to large businesses have their own super fund which is only available to their employees. They can offer tailored fee and insurance arrangements, and a wide range of investment options.

Industry funds

Industry funds were originally established to support employees within a particular sector but most are now open to everyone. They stand by a non-profit, member-first ownership model and re-distribute profits from investments directly to members.

Retail funds

These funds are run by banks, financial institutions or investment companies, designed to give members a vast array of investment options. The company that owns the fund generally aims to keep some profit which is paid to shareholders.

Public sector

Designed for people working in the public sector, these funds have limited investment options but low fees. Profits remain within the fund for the benefit of members.

Self-Managed Super Funds (SMSFs)

SMSFs enable you to have complete control over how your retirement savings are invested—a private super fund that you manage yourself.

Personal super contributions

The percentage of your salary that your employer contributes into super may not be enough to sustain the lifestyle you currently have, or the one you wish to have, during your retirement.

There are a range of strategies you can implement to improve your retirement savings, like putting a little extra money into your super while you’re still working.

Personal super contributions—those made from money you’ve already paid tax on such as savings or your take-home pay—are tax deductible. These contributions can be claimed against your assessable income when you lodge your tax return.

Personal deductible contributions can be a powerful way to boost your retirement savings. If you have surplus cashflow or savings, you may want to make an after-tax super contribution and claim a tax deduction to reduce your taxable income. 

Tax on super investment earnings

Your super fund pays tax on your behalf for any income or profits your make from your investments. The tax is reflected in the daily unit price for each investment option.

  • Super account investment earnings are taxed at a rate of up to 15%

  • Retirement pension account investment earnings are not taxed.

Bottom line: Super is harder than it probably should be—but better than you think. The mix of a whole range of tax savings, structured long-term investing and regular contributions make it a powerful engine for delivering an anxiety-free retirement.

Important information and disclaimer

This article has been prepared by NULIS Nominees (Australia) Limited ABN 80 008 515 633 AFSL 236465 (NULIS) as trustee of the MLC Super Fund ABN 70 732 426 024. NULIS is part of the group of companies comprising Insignia Financial Ltd ABN 49 100 103 722 and its related bodies corporate (‘Insignia Financial Group’). The information in this article is current as at January 2023 and may be subject to change. This information may constitute general advice. The information in this article is general in nature and does not take into account your personal objectives, financial situation or needs. You should consider obtaining independent advice before making any financial decisions based on this information. You should not rely on this article to determine your personal tax obligations. Please consult a registered tax agent for this purpose. Opinions constitute our judgement at the time of issue. The case study examples (if any) provided in this article have been included for illustrative purposes only and should not be relied upon for decision making. Subject to terms implied by law and which cannot be excluded, neither NULIS nor any member of the Insignia Financial Group accept responsibility for any loss or liability incurred by you in respect of any error, omission or misrepresentation in the information in this communication.