Superannuation back to basics: What is superannuation?

We understand that sometimes it can be difficult to make sense of the language used by experts when they talk about superannuation, sometimes referred to as ‘super’. For that reason, we’re bringing you ‘Superannuation back to basics’ – a new series to cut through the confusing jargon and break it down into information that is easy to understand. 

Whether you are starting out on your retirement savings journey, don’t know why you need to save a percentage of your salary every month, or just looking to increase your knowledge around Australia’s superannuation system, the ‘Superannuation back to basics’ series is for you. 

In this article, we’re kicking off with an overview of our superannuation system, how it started, and why it’s integral to the Australian way of life.  

What is superannuation? 

At its core, superannuation is a long-term investment account that allows you to save for your retirement. Over your working life, you add to your super account via contributions, and these savings are then invested in a range of assets, such as shares, property, and cash, with the goal of growing your balance over time. 

Superannuation is designed to be a safety net for your retirement, allowing you to maintain a decent standard of living when you no longer earn a regular income. As such, there are very strict rules around when you can access your superannuation, and for most of us, this is only allowed after we retire from work. 

Australia’s superannuation journey 

For some of us, superannuation has always been a part of our working life, and we have been saving now for many years. However, compulsory superannuation - known as the Superannuation Guarantee (SG) - was only introduced in 1992. Before this, superannuation wasn’t compulsory. Some retirement savings plans were available, but these were not obligatory for all workers.  

With the introduction of SG, everyone who has been an employee at some stage in their working life will now have some superannuation savings. As a result, Australia’s superannuation assets are now worth $3.9 trillion (as of June 2024) and are continuing to grow, according to data released by the Australian Prudential Regulation Authority (APRA) 

Key components of superannuation 

Australia's superannuation system has two key components – the accumulation phase and the retirement phase. 

• The accumulation phase is the period when you're actively contributing to your superannuation fund and growing your savings. During this phase, both employer and personal contributions can be made, and your superannuation is invested to generate returns, also known as earnings. Earnings in this phase are taxed at a concessional rate (typically 15 per cent). 
• The retirement phase begins when you retire and start drawing an income from your superannuation, either as regular pension payments or a lump sum. In this phase, investment earnings are generally tax-free, and the focus shifts from growing your balance to using your savings for living expenses. 

The different types of superannuation funds 

In Australia, there are several types of superannuation funds, each offering different features to suit various needs. The most common types include: 

1. Industry funds
   These are typically not-for-profit funds that were originally created for specific industries. They tend to offer low fees and a range of investment options. While they were originally only open to people working in a specific industry, many have now opened up to the general public. 
2. Retail funds
   These funds were opened by banks or investment companies, and these are profit-driven funds. They offer a wider variety of investment choices but often come with higher fees, as profits are returned to shareholders. 
3. Corporate funds
   These are arranged by employers, for their employees. They can be either retail or industry funds, and the employer may negotiate special terms for members. These are not open to the general public. 
4. Public sector funds
   These funds were originally designed for government employees and have traditionally offered generous benefits to their members. They are often closed to the general public. 
5. Self-managed superannuation funds (SMSFs)
   These are ‘do it yourself’ funds where members have full control over investment decisions. They are suitable for people who have a strong understanding of investment and compliance, and desire control of the way their superannuation is invested. SMSFs generally involve more responsibility and personal involvement than the other types of superannuation funds  

Each type of fund has its own fee structure, investment options, and level of flexibility, so it’s very important to choose one that aligns with your needs and preferences, and financial goals. Your BDO adviser can help to break down the differences between these types of funds in the context of your personal situation. 

Why is superannuation important? 

Superannuation plays a crucial role in providing financial independence in retirement. It helps ensure that individuals don’t have to rely solely on the government pension, which is generally not enough to fund the lifestyle they have likely enjoyed throughout their working life. As the Australian population ages and life expectancy rates rise, many Australians will need their superannuation to last for a long time. 

It's never too early - or too late - to start thinking about boosting your superannuation savings. In future issues of our ‘Superannuation back to basics’ series, we will look at some of the easy ways you can grow your savings for retirement. 

Superannuation is an essential part of your financial future. It’s not just about saving for retirement but about building a foundation for long-term security and independence. By understanding how super works, taking control of your contributions, and making informed investment decisions, you can set yourself up for a comfortable retirement. 

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.  

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