Superannuation Guide Australia – Today I’ll cover everything that you need to know about superannuation. Including what it is, how it works, how you can build it and important considerations when choosing a super provider and investment option.
Superannuation or ‘super’ is money that is set aside by your employer (or yourself if you’re self-employed) during your working life. This money is then managed by a super fund, which invests your money with the intent of growing it over time through the power of compounding returns. This process is in place to help Australians generate enough wealth to be able to live on once they retire.
The main purpose of superannuation is to help working Australian’s accumulate enough wealth to supplement the age pension during retirement years. Ideally, super funds can grow your super to a point in which you can solely live off of your super fund after retiring. This reduces strain on the government, as you can support your lifestyle without relying on government pensions. As such, the government incentivises people to invest in their super by providing tax benefits and mandating employers to make regular contributions to their employee’s funds.
Typically, your employer will pay money (contributions) into your super account for you. This is referred to as the ‘super guarantee’. These contributions are paid on top of your salary and wages and must be at least 9.5% of your regular pay. If you are over the age of 18 and are paid $450 or more (before tax) in a calendar month, your employer is mandated to pay this super guarantee. These funds are designed to generate returns above inflation so that by the time you retire, you will have accumulated enough wealth to live on.
Your super will organically grow over time due to two main reasons: employer contributions and investment returns.
Firstly, your employer will make regular contributions under the super guarantee. Under this guarantee, you will receive your regular pay in your bank account, in addition to a further 9.5% that gets added to your super fund. This can add up quickly, with approximately 10% of your pay being added to your super fund each time you are paid. Government jobs, in particular, can offer higher contributions, with some offering 15% or greater.
Secondly, super funds are designed for the most part to generate returns that beat inflation (except for defensive investment options). Super funds typically come with management and performance fees, meaning that they can cost people money. To ensure that you don’t lose money to these fees, the super fund manager will select a range of assets that generate returns greater than inflation. These assets are referred to as growth investments and can include but are not limited to equities (shares), real estate, bonds, REITs, LICs, ETFs, cryptocurrencies, precious metals and cash.
The majority of people are allowed to choose the super fund that they want their contributions paid into. You can select your super fund by filling out a Standard Choice Form. If you’re eligible, your employer must give you this form within the first 28 days of you working for them. If you are unable or unwilling to select a fund, your employer will choose one for you. If you are unable to remember your existing super fund’s details, then you can use the myGov service to view your super account/s.
For more information on Standard Choice forms and where to find one, please refer to this guide by the ATO
If you’re with a default fund or are looking to change funds, then you can open an account with another superannuation provider. Once this is done, fill out another Standard Choice Form to advise your employer to pay contributions to the new fund. Your HR or financial department may be able to help you with this process. Once your employer agrees to begin paying contributions to the new fund, you can log in to myGov and choose to consolidate your super into your new account. This means that any previous funds from your former super fund will be rolled over into your new one.
For more information on how to change super funds, please refer to this useful guide:
There are a lot of different factors that need to be weighed up when selecting your ideal super fund. While these factors may seem daunting at first, particularly for people who are just starting their first job, it’s important to research super funds to make sure you get the best return on investment. When selecting a super fund, these are some of the main factors that should be considered.
|What to Look For in a Super Fund|
Each one of these factors will play a significant role in determining what super fund is best suited for your needs. Each factor is explained in more detail below.
Arguably the most important aspect of any super fund is its performance. Performance refers to annualised returns (how much it makes each year). These returns are typically viewed across 1, 3-, 5-, 7- and 10-year periods. However, to achieve the best estimate of the fund’s overall performance, it is recommended that you look at returns over a 5 year or greater period to assess the average annual returns.
It is important to note that past returns aren’t always indicative of future returns. However, if a fund is consistently outperforming or underperforming its competitors, then this is worth noting. Additionally, it is important to compare similar investment options between funds. For example, compare two balanced portfolios between companies rather than comparing a balanced investment option from one company against another company’s growth option, as these will naturally yield different results.
If you would like to compare different super fund’s performances, I recommend this tool by Canstar
Just make sure that you use the ‘Edit’ feature to input the correct details, such as your age and super balance.
Fees are another important factor that should go into picking a super fund. Fees are typically charged in two different ways – a fixed dollar amount or as a percentage. In some instances, you may be charged both a fixed dollar amount and a management expense in the form of a percentage. Additionally, these fees can be taken out as a lump sum once per year or on a more frequent basis such as monthly/semi-annually.
The two most common fees for super funds are administration fees and performance fees. Administration fees refer to the cost of operating and maintaining your super fund. These fees are generally a flat dollar amount. Performance fees are calculated by taking into account a range of factors such as administration, investment performance, member fees, account size rebates and fee tiering. These are typically calculated on a percentage basis of your overall account balance.
Of these two common types of fees, the performance fee is often regarded as the more significant fee due to it being percentage-based. For example, a 1% management fee might not be significant if your balance is $10,000 as this is $100 per annum. However, if your fund is $100,000 this fee increases to $1,000 per annum and so on. For this reason, both fees with a particular emphasis on performance/percentage-based fees should be carefully looked into when deciding on the right super fund.
If you would like to compare different super fund’s fees, I recommend this tool by Ratecity
This comparison tool highlights the past 5-year performance, administration fees, performance fees (calc fees on 50k) and additional services available, which will become more pertinent in the next topic.
Insurances are another important aspect of super funds. Generally speaking, super funds will typically offer four types of insurances for their members. These insurances are
When you join a super fund, they may or may not automatically apply these insurances to your fund. As such, it is important to understand what these types of insurances cover, as they may or may not be necessary for your circumstances.
Life Insurance or death cover refers to a lump sum payment that is paid out to your beneficiaries when you die. If you have a partner or a dependent, this lump sum can be used to repay any debts that you owe and to help with living costs. As such, for people with partners or dependents who require you for financial support, this type of insurance is often chosen to ensure that these people are taken care of in the event of your death. Alternatively, if you don’t have any dependents, this type of cover may not be necessary.
For more information about death cover and whether it is suitable for your circumstances, please refer to this guide:
TPD insurance is another lump sum payment that gets paid out if you become totally and permanently disabled as a result of an injury or illness. This can cover you for your occupation when you’re unable to work in the particular job that you were working in before the injury/illness. Alternatively, it may cover any occupation, which occurs when you’re unable to ever work again in any job suited to your education, training or experience.
This type of insurance can often be recommended in labour-intensive jobs or jobs with high-risk thresholds, as the likelihood of injury for these professions is higher. However, it can be suited to people of all professions depending on their risk tolerance.
For more information about TPD insurance, whether it’s suitable for you and how to read TPD policies, please refer to this guide:
Income Protection Insurance pays up to 85% of your pre-tax income for a specified time if you are unable to work as a result of a partial or total disability. This form of insurance is designed to supplement part of your income as a result of partial/total disability to alleviate financial burdens as a result of ceasing work. This particular type of cover is often recommended for sole traders and small business owners, who may not have sick or annual leave. However, it can also be advantageous for people with dependents and/or those who have considerable debt levels such as mortgages.
For more information on Income Protection Insurance and whether it is suited to you, please refer to this guide:
Before deciding on a super fund portfolio, it’s important to understand the two types of investments: defensive and growth.
Defensive Investments are low-risk investments that aim to provide stable returns. These options are often chosen by people looking to preserve capital and/or mitigate against portfolio volatility. Defensive investment options include cash in the form of high-interest savings accounts and term deposits, as well as fixed-interest investments such as Government and corporate bonds. For these reasons, defensive investments are commonly used by people nearing retirement age, as it mitigates against portfolio volatility and preserves accumulated capital.
Growth Investments are high risk, high return investments that aim to provide higher returns than defensive assets. These investments typically comprise property, shares, REITs, ETFs, LICs and alternative assets. However, these potential higher returns come at the expense of short-term market volatility. As such, these investments are often chosen by people who are at least 10 years away from retirement age. Investors far from the preservation age are unable to access these funds in the short to mid-term, so can afford downward fluctuations in price movement in pursuit of long-term capital growth.
For more information on the difference between defensive and growth investments, please refer to this guide
Another important aspect of choosing a super fund is their investment options. Typical investment options generally fall under three categories – premixed options, choose your own options and self-managed super funds (DIY). Each one of these options comes with different pros and cons, with some being better suited to certain individuals over others.
Premixed Options are pre-determined portfolios selected by the super fund. These options have fixed allocations of certain assets and are designed to suit certain risk appetites. Common pre-mixed investment options include but are not limited to Growth, Balanced, Conservative, Cash and Ethical.
Most Australians will be allocated a premixed investment portfolio when they join a super fund, this is more often than not Balanced. However, a range of factors such as your age and risk tolerance can influence which of these options if any, are better suited to your needs. For this reason, it is important to understand how these portfolios are constructed and the underlying assets that comprise them.
Growth investment options as the name suggests are portfolios that consist primarily of growth assets. Depending on whether it is a growth or high growth investment option, the portfolio may consist of an 85-100% growth investment allocation. These portfolios are often selected by people far from the preservation age, as they can withstand short-term market volatility in pursuit of higher-than-average growth across a long investment horizon.
Balanced investment options have a more neutral ratio of defensive and growth assets. More aggressive balanced options typically consist of a 70/30 ratio of offensive to defensive assets. Whereas other balanced portfolios can contain a more even 50/50 split. These portfolios are typically the default investment option given to people when they sign up for a super fund. The reason for this is that it offers a medium-high risk profile, meaning that it can outperform the more conservative investment options without encountering as much risk/volatility as growth options.
With that being said, members far away from the preservation age will likely benefit more from a growth portfolio due to its higher percentage of annualised returns. Conversely, this option may be considered too risky/volatile for people nearing their preservation age. In this instance, the next two portfolios may be more suited.
Conservative investment options are portfolios that contain a higher defensive allocation than growth allocations. These portfolios are generally a 70/30 split, with the majority of the portfolio consisting of fixed interest and cash investments. Conservative investments are chosen to reduce the risk of loss at the expense of receiving lower returns. As such, they are typically chosen by people who are nearing retirement that still want to have some exposure to growth assets to increase their capital.
Cash investment options are portfolios consisting entirely of defensive assets. These portfolios are not growth-based and as such, are chosen specifically to preserve capital. People who are on the verge of retiring or those who have retired will often choose this investment option. The reason being, that they have already accumulated capital and are looking to preserve it. Additionally, for people who have retired, this investment is optimal as they won’t have to draw down on their capital during years where growth options are performing poorly.
Ethical investment options refer to portfolios that screen out growth investments that don’t meet certain environmental, social and governance standards. While the criteria of what constitutes an unethical company vary across super funds, these are often companies associated with stigmatised activities. These activities can include gambling, alcohol, smoking, firearms and coal mining among others.
These portfolios are selected by people who do not wish to support these activities by investing in these companies. As the premise of ethical investing is relatively new, the availability of these investment options varies among super funds. The ratio of growth investments in these funds can also vary, with conservative, balanced and growth-related ethical investments being offered across different funds.
|Investment Option||Growth Asset Allocation||Defensive Asset Allocation||Expected Returns||Minimum Investment Timeframe||Short Term Risk||Estimated Number of Negative Annual Returns Across 20 Years|
|Growth||75-100%||0-25%||Very High||10+ Years||Very High||4-5 Years|
|Cash||0%||100%||Low||1 Year||Very Low||0|
The above table is a rough guide and does not constitute financial advice. Pre-mixed investment options vary significantly between super funds, allocations, expected returns, investment timeframes and risk levels varying across funds, even if they offer similar investment options. As such, do your own research into your super fund’s investment options.
Some super funds offer the ability to create a custom-mixed investment portfolio. These portfolios differ from custom portfolios as you can select the types of investments and the allocations. For example, if you wanted a 100% growth investment portfolio consisting of equities but the pre-mixed growth portfolio offered by your super fund was only 70% equities, then this is a way of getting your desired allocation.
Similarly, you may be happy with the allocation of growth investments in your portfolio but not with the weighting of the growth options. For example, you may be happy with the 70% growth investment option offered by your provider but you may want the majority of that 70% to be geared towards real-estate over equities or vice versa. In these scenarios, it makes sense to tailor your investment through the choose your own method.
However, these choose your own funds are recommended for seasoned investors and people who have a thorough understanding of the risks associated with particular investments. These types of funds can also encounter different fees to pre-mixed options. For these reasons, I recommend consulting with a qualified financial advisor or at the very least, doing thorough research into different assets before deviating from the pre-mixed options.
SMSFs are funds that are managed by the member. These are external to retail and industry funds and encompass a lot more responsibilities, such as managing investments, insurances, accounting, record keeping.
According to investment reports, SMSFs have an average operating cost of $6,182 per annum and trustees spend approximately 100 hours per year running them. For these reasons and a plethora of others, SMSFs are only recommended for people with a thorough understanding of investment options who have consulted with financial advisors.
For more information on SMSFs, please refer to this guide:
When comparing funds, it is important to factor in all of the above factors. Variables such as fund performance, admin fees, performance fees and insurance fees should all be carefully examined when deciding on a fund. These details can be found on super fund websites under their product/fund sections.
If you would like to use an external tool to compare these factors across multiple superannuation providers, I recommend the following two tools:
There are numerous ways to grow your super. This portion will cover the different methods you can employ to help increase your super balance.
The simplest method to help grow your super is to optimise your fund. You can optimise your fund through a range of different methods. These methods can include
Have you ever worked odd jobs or perhaps had a part time job in high school before beginning your career? If so, it is possible that you have money in one or multiple super accounts that you have forgotten about. If this is the case, you can recover this lost super by clicking the ‘Manage my Super’ button on your MyGov account. Alternatively, you can contact the ‘Lost Super Search Hotline’ on 13 28 65.
This process takes minutes and could help you recover hundreds and even thousands on lost super. For more information on the process of recovering lost super, please refer to this guide:
Similar to the above point, if you have super in multiple super funds, you can end up paying excessive amounts on performance and administration fees across these funds. Additionally, you could be paying for multiple, overlapping insurances. These unnecessary expenses can significantly detract from your return on investment. As such, it is important to consolidate super into a singular fund that meets your essential criteria. When selecting this fund, it is important to consider the aforementioned metrics such as fees, performance and insurance options.
If you have multiple super funds and would like to consolidate, this is a useful resource.
Some employers offer their employees the option of having part of their pre-tax income paid into their super account. This is known as salary sacrificing or salary packaging. Super payments/concessional contributions are taxed at a rate of 15%.
For workers earning a taxable income exceeding $45,000, salary sacrificing may be a tax-effective strategy, as it is paid out from your pre-tax income. This can in turn reduce your taxable income by lowering your tax rate, potentially leading to less income tax. However, the combined total of your employer and salary sacrificed contributions must not exceed $25,000 per financial year, meaning that there is a limit to this strategy.
Salary sacrificing is dependent on a range of factors such as your personal income, whether your employer offers salary sacrificing and if you have any other forms of salary packaging. For more information on salary packaging and tax rates, please refer to the following resources:
After-Tax contributions are contributions made by you to your super from your taxable income. These are referred to as non-concessional contributions because you have already paid tax on the money. Up to $100,000 in non-concessional contributions can be made each financial year.
For more information on non-concessional contributions, please refer to this guide:
LISTO is a government superannuation payment of up to $500 that is designed to help low-income earners save for retirement. If you earn less than $37,500 per year, you may be eligible for a LISTO payment. The LISTO is 15% of the concessional (before tax) income paid by you or your employer into your super fund. This payment ranges from $10 to a maximum of $500 per financial year.
If you are eligible for LISTO, it will be determined by the ATO and paid automatically.
For more information on LISTO and eligibility, please refer to this guide by the ATO
If you earn less than $52,697 per year (before tax) and make after-tax super contributions, you may be eligible for a matching contribution from the government, called a co-contribution. Low and middle-income earners who make a personal (after-tax) contribution to their super fund may be eligible for a government super co-contribution up to a maximum amount of $500.
Similar to the LISTO, this is determined by the ATO and is paid automatically to eligible people. For more information on Government Co-Contributions and eligibility, please refer to this guide
The FHSS scheme allows Australians to save money for their first home within their super fund. This was introduced by the Australian government in 2017 to help first home buyers save faster due to the concessional tax treatment of superannuation.
To be eligible for this scheme, you must be a first home buyer and meet both of the following requirements:
If you are eligible, you can apply to have a maximum of $15,000 of your voluntary contributions from any one financial year included in your eligible contributions to be released under the FHSS scheme, up to a total of $30,000 contributions across all years. You will also receive an amount of earnings that relate to those contributions.
For more information on eligibility requirements and whether this is suited to your circumstances, please refer to the following guide
If you would like to learn more about different types of investment options, I have covered multiple forms of growth investments in previous posts. These can be found here: