Superannuation back to basics: How does superannuation work?

At BDO, we understand that superannuation can sometimes feel like a large and overwhelming system, especially when you are just starting out. For that reason, we’re bringing you ‘Superannuation back to basics’ - a series of articles that are designed to simplify the confusing language of superannuation and break it down into information that is easy to understand. 

In this article, we build on some of the information we looked at in our first article, What is superannuation?, to take a deeper dive into how it works for individuals.

How do I choose a superannuation fund?

When you start working as an employee, your employer is required by law to start making contributions to superannuation on your behalf. Before they can do that, you need to choose a superannuation fund. In Australia, we have five different types of superannuation funds: industry, retail, corporate, public sector and self-managed funds (see our first back to basics article for explanation of these).

To choose a fund that suits your situation and helps you maximise your retirement savings, consider the fund’s current and previous year performance, administration fees, insurance offering, and any member benefits, as well their available investments options.

It’s also important to consider your own goals and values when choosing a fund. For example, you might opt for a fund with higher returns (which generally comes with higher risks), or you may value a higher level of security (which generally means lower returns and lower risks).

Someone who values sustainability and has environmental concerns may choose an ethical super fund. For most people, their superannuation will be one of the largest investments they will ever have, so it's worth taking the time to check your options and decide what's right for you.

The Australian Securities Investment Commission (ASIC) and the Australian Taxation Office (ATO) both have useful online tools that can help when choosing a super fund.

These days, most people have the option of choosing their super fund, but it can depend on your employment agreement, so speak with your employer if you need clarification.

How is super invested?

Your chosen superannuation fund will invest your money in assets, such as shares or property, and in return for their investment your funds earn income. This income is then reinvested into more assets, which will earn more income. This is known as compound returns. 

How your super fund chooses to invest your super can have an impact on the performance of the fund, as well as your balance, so it is important to choose a fund wisely.

How do I keep track of my superannuation?

When you set up your superannuation account for the first time, you will be asked to provide your Tax File Number (TFN). By giving your super fund your TFN, your new super account will be linked up to your myGov account, and will always be easy to keep track of your superanuation account. 

When you log into your myGov account, your superannuation accounts can be viewed via the ATO portal. Once you have accessed your ATO record, you will find your superannuation details on the ‘home’ screen.

From here, you can undertake a number of tasks in regard to your superannuation, such as viewing the details of current and closed accounts, requesting to transfer funds between open superannuation accounts, and checking in on your contributions.

Your superannuation fund will also provide regular statements that contain important details, such as your total balance, your insurance cover, and the fees you have paid. They may also have an online portal that you can visit to view your details and undertake other tasks. Check with your fund on how to access this.

Important superannuation terminology

We have used a number of superannuation terms in this article – let’s break them down.

  • Investment options

These are the various ways that your superannuation fund can invest your money. These can range from very conservative investments (such as cash) to high growth (with some riskier investments). Some funds now have options where you can choose the mix of asset types or pick direct investments. For example, you might prefer certain Australian shares over international shares. This option helps you to tailor your superannuation to your own preferences and provides greater flexibility.

  • Investment returns

This is the change in value of an investment and is usually expressed as a percentage for superannuation funds. Funds provide their average return for one year, five years, and ten years, however it is recommended that you look at fund’s performance over a minimum of five years to take into account any major changes in the market.

Use the ASIC and ATO superannuation comparison tools to compare funds and the difference in their performance - but remember to compare similar funds. For example, there will be a difference in performance between a high growth fund and a conservative fund, but the risk levels may also be different.

  • Fees

The term ‘fees’ refers to the cost of managing your superannuation account. These can include administration and investment fees, and other costs, and these vary by superannuation fund. Use the ASIC and ATO superannuation comparison tools we have linked above to compare funds and the difference in their fees.

  • Insurance

Most super funds offer various insurance to their members, such as life, income protection or total permanent disability (TPD) insurance, for which you pay monthly premiums to the superannuation fund in return for the cover.

You can check your cover type on your last statement you received from your fund, as well as the level of the insurance. The higher the level of insurance, the higher your premiums will be. Insurance in super funds can be complex, so look out for our next ‘back to basics’ article that will explain insurance in superannuation in more detail.

How BDO can help 

Our superannuation team can help if you have any questions about superannuation, no matter how basic. If you require any assistance, we’re here to help - contact us today and ensure your savings are working for you.


Disclaimer

The information contained in this publication is purely factual in nature and does not take into account your personal objectives, financial situation or needs. It is provided as an information service only and does not constitute financial product or other professional advice and should not be relied upon as such. Before making any investment or financial decisions you should consider your particular objectives, and financial circumstance or needs. Where information relates to a particular financial product you should obtain and consider the relevant Product Disclosure Statement and obtain advice from a financial adviser before making any decision. If you do require financial advice, please contact the relevant BDO member firms in Australia who will be able to assist you in their capacity as an Australian Financial Services licensee. BDO Australia Ltd and each BDO member firm in Australia, their partners and/or directors, employees and agents do not give any warranty as to the accuracy, reliability or completeness of information contained in this publication nor do they accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it, except in so far as any liability under statute cannot be excluded.

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