Superannuation 101: A Beginner Guide

What is super?

Superannuation (super) is a retirement savings scheme where your employer is required to pay a percentage of your salary into your super account. Your super fund then grows the money through investments over time, providing you with a lump sum pay out or income stream when you retire.

The purpose of superannuation is to substitute or supplement the age pension, giving you a higher income in retirement than the age pension alone can provide. You can find out about specific rates and thresholds by visiting the ATO website.

How does super work?

When your employer pays a percentage of your wage into your nominated super fund, it is pooled with other people’s money and then used by the fund managers to buy and hold assets.

The main asset classes include shares and property (known as growth assets) and fixed interest and cash (known as defensive assets). Growth assets tend to be more high risk, while defensive assets offer lower returns but are less volatile.

The super fund invests in a mixture of both, according to the level of risk nominated by you or dictated by their policies. Known as diversification, this trade-off between risk and return is designed to achieve growth over the long-term.

When can I access my super?

You can withdraw your super when you turn age 65, even if you're still working, or when you reach your preservation age, providing you have retired. Your preservation age depends on when you were born and ranges between 55 and 60.

If you reach your preservation age but haven't retired, you can still access a portion of your super through a transition to retirement pension. In some special circumstances you can access your super before you reach your preservation age, these circumstances include incapacity due to a medical condition, severe financial hardship, compassionate grounds or if you develop a terminal medical condition.

How do super funds work?

There are two kinds of super funds, defined benefit funds, where retirement benefits are determined by a formula rather than investment returns, and accumulation funds where your money accumulates over time from the investment returns generated by the fund (most super funds are accumulation funds).

Super funds fall into 4 different categories:

• Retail funds - usually run by banks or investment companies who run the fund to make a profit. Anyone can join and they usually have a wide range of investment options.
• Industry funds - not-for-profit funds where profits are put back into the fund. Anyone can join, although some are only for members of specific industries.
• Public sector funds – funds for government employees where profits go back into the fund. They typically have a modest range of investment choices but also very low fees.
• Corporate funds - funds arranged by companies for their employees where profits are returned to members and only employees can join.

How do funds differ?

Super funds differ in a variety of ways including:

• Their return rate - the percentage of return for each investment option returned to members at the end of the financial year.
• Their risk appetite - the level of risk they are prepared to accept in the pursuit of their investment objectives.
• Their investment options – the options they offer members (i.e. a diversified option. pre-mixed options selected by experts, a MySuper account with lower fees and simple features etc).

How to choose a super fund

When comparing super funds, you’ll need to weigh up factors such as:

• Performance – compare the funds’ investment performance over at least a five year period.
• Fees – how much do they charge for their services? (the lower the fees the better).
• Insurance – do they offer default insurance cover such as life, disability and income protection and if so what are their premium rates, what level of cover do they provide and are there any exclusions that might negatively affect you?

The best way to compare super funds is by downloading and reading their Product Disclosure Statements and visiting superannuation comparison websites.

Can I self-manage my super?

There are a number of positive steps you can take to help your super grow faster. If you are with an accumulation fund, you can match your employer’s contributions with extra contributions of your own.

If you are beginning your working life and your fund offers a range of different investment options, you can choose those more heavily weighted towards growth (with correspondingly higher risk). Or if you are nearing the end of your career, you can choose lower risk options that will reduce the likelihood of negative returns before you retire.

Or if you really want total control over how your super is invested, you can elect to start your own Self Managed Super Fund (SMSF).

Benefits of an SMSF include:

• Tax benefits - SMSF income is taxed at the lower tax rate of 15%.
• Property investment - you can buy investment property through your SMSF and earn income from capital gains and rental payments.
• Rare asset classes – you can buy art, antiques, collectables and even gold, which you can’t do in a standard super fund.
• Fast reactions – you can react much faster than big super funds and instantly adjust your asset allocation if market conditions change.
• Family inclusion - you can have up to four family members in your fund.

While running your own SMSF can give you much more control over your super, it’s certainly not for everyone. There are a lot of costs associated with setting up and managing a SMSF, so you’ll need to have a large super balance (at least $200,00).

You’ll also need to know what you’re doing, as you’ll be solely responsible for your investments and whether they do well or fail. And you’ll need the time to devote to it, as fund management can be a time-consuming process.

You should also ideally have some experience with legal matters, as a SMSF has a variety of legal obligations. And you’ll need to be familiar with the ATO’s constantly evolving super regulations, as heavy penalties apply for non-compliance.

An SMSF involves set-up fees and ongoing reporting, auditing, admin and investment management fees; all of which could make it more expensive to run than sticking with a standard super fund.

So if you do decide to go down the self-management road, it would be wise to get some professional advice from an accountant or investment adviser beforehand, to make sure you’re on the right track.

Keen to learn more?

First step, get in touch with your super fund. They’ll be able to let you know your current financial situation, investment status and provide more information about how your money is being invested. Getting your super sorted early can set you up for life.

Thinking about starting to invest? Check out our Home Loan Guide for 6 Ways To Get Into Investing As a Beginner. Or if you’re thinking about investing in property we can give you 7 tips for researching and buying your first investment property.