How does superannuation work?

The more you know, the more you can super work for you.
Superannuation is set up when you start work and helps fund retirement, so how does it work?Getty

If you find superannuation confusing, you’re not alone. According to a report from the University of Melbourne, most Australians think super is unfair and many may not understand it. So, how does superannuation work?

In very basic terms, superannuation is set up as a retirement fund for Australians when they are first employed. Employers are legally required to pay money into your super account and that money is invested by the fund.

This means you’ll typically earn interest that increases the balance. Then, when you retire (and meet the age requirements), you can use your superannuation as income.

In fact, it’s the second-most common form of primary income for retired Australians, after the Age Pension.

This makes it important to understand superannuation, whether you’re working or retired. So, let’s take a look at the key details.

How are superannuation accounts set up?

There are two main ways to open a super account:

1. The default option with your employer

When you start a job, your employer asks for details of your superannuation account. If you don’t have one (or don’t provide the details), they’ll set up an account with their default super fund.

This is a very common and easy way to get a super account. So easy, in fact, that there were some 4 million Australians with more than one super account in 2023 according to data from the Australian Taxation Office (ATO).

Having multiple super accounts could mean you are paying unnecessary fees and charges. This can reduce your overall retirement income.

Australian Taxation Office

What’s more is that people aged between 46 and 60 are among the most likely to have two super accounts. They’re also among the most likely to have three or more, although the ATO data shows that is less common.

2. Choosing your own superannuation account (or switching)

You can open a superannuation account online. It’s a relatively simple process and can give you more awareness of the fees, investment options and other details (such as included insurance).

It also means you can compare these details across different funds to help you choose one you want.

If you’re switching from another fund, you can even get the new super fund to transfer the balance to your new account.

Choosing your own super account gives you more control over how it's managed and can help reduce the risk of multiple accounts.

How do I find my superannuation?

You can search for lost and unclaimed super through your myGov account when it’s linked to the ATO. Your current super fund can also do a search on your behalf.

If you’re not sure what your current super fund is, you can get details from your employer. You may even be able to find it on your payslip, as they need to include details of the contributions they make.

How does my superannuation balance grow?

Your employer is legally required to pay a set rate of superannuation based on your income.

You’re also able to make voluntary super contributions, which can reduce the amount of tax you pay. This includes contributions from your before-tax pay (such as through salary sacrificing) or your after-tax pay.

Government co-contributions

If you’re in a low or middle income bracket, you might also be eligible for a government co-contribution of up to $500 when you make voluntary contributions.

To give you an idea of eligibility, the co-contribution thresholds for the 2023-24 financial year were between $43,445 and $58,445. For the 2024-25 financial year, they’re $45,445 and $60,400.

What is the current superannuation rate?

Your employer must pay a rate of at least 11% of your ordinary earnings into your super account.

This is known as the ‘super guarantee’ or SG and the rate gradually increases to 12% on 1 July 2025.

How much super should I have?

To comfortably retire at age 67, your super balance should be around $595,000 as a single person or $690,000 as a couple according to the Association of Superannuation Funds (ASFA) Retirement Standard. For a modest retirement at the same age, the benchmark is $100,000 for both single people and couples.

The amount of super you need could also be different depending on what other assets you have, including owning a home and holding other investments.

If you’re not yet at retirement age, the ideal amount of super will also be different because you’re still adding to your balance.

If you want to check whether or not your on track for a comfortable retirement, the ASFA has a retirement tracker tool that uses your current super balance to estimate how much you’ll have when you retire.

How much super you should have depends on factors including your age and when you plan to retire.

Is superannuation taxed?

Superannuation is taxed at different times and in different situations.

But if you’re aged 60 or over, you typically won’t be taxed on super if it’s an income stream. The same goes for a lump-sum withdrawal if it’s from a taxed super fund.

“In most cases, once you are over 65, all your income and profits will be tax free and all the money you take out will also be tax-free,” certified financial planner, podcast host and author Drew Meredith tells The Australian Women’s Weekly.

Drew, who co-authored the book The Golden Years: how to plan a happy and financially secure retirement with Jamie Nemtsas, says the way superannuation is taxed makes it a valuable tool for retirement planning.

“Super is by far the best structure or ‘wrapper’ for every Australian to hold their retirement assets.”

Before retirement, superannuation investment earnings are also taxed at 15% (but may be tax-free after retirement). Tax may also apply if you make an early withdrawal.

It’s also worth keeping in mind that you could claim a tax deduction on eligible contributions you make when you’re still working. Voluntary contributions from your take-home pay are taxed at 15%, which is likely to be lower than the income tax you paid. So, if you’re strategic about contributions, you could end up with a bigger tax refund.

But if your combined income and super contributions are over $250,000, you may have to pay Division 293 tax.

If you want more details about when super is taxed, visit the ATO website or discuss it with a tax agent or financial advisor.

When can I get my superannuation?

You can access your super when you retire and have reached what’s known as the ‘preservation age’. This is between 55 and 60 years old, depending on when you were born.

If you’re still working when you reach 65 years of age, you can access your super without retiring.

It’s also possible to get early access to some superannuation, but there are very specific requirements (and it can affect your income when you retire).

Jamie Nemtsas, co-author of The Golden Years, adds that it’s important to be informed as you near retirement age.

“Despite this being one of the most important and enjoyable parts of one’s life, the entire system is essentially set up for those still accumulating capital and saving money.”

He says a big issue is that people “don’t have a plan in place yet and expect everything to be okay once they retire.”

Learning more about how superannuation works is a good starting point for planning your retirement. And it’s never too early to start.

Checking your superannuation can help you plan for a comfortable retirement.

How do I withdraw super?

You can request withdrawal through your superannuation fund when you meet the eligibility requirements.

For retirement, that’s typically when:

  • You have reached Preservation Age and are retiring
  • You have reached Preservation Age and want to set up a “transition to retirement” income stream
  • You are over 65 years of age

It’s also possible to withdraw some super early but there are very strict requirements. For example, if you needed to pay for essential medical treatment or were experiencing extreme financial hardship, you might be eligible for early access to part of your super balance.

First home super saver scheme (FHSS)

The FHSS gives you a way to use your super account to help save and buy your first home. With this scheme, you can access up to $15,000 of voluntary super contributions made in a tax year (or up to $50,000 over all years of contributions) to put towards the deposit on your first home.

To get the funds, you need to request a FHSS determination through myGov. Once you have the determination, you can request up to the maximum amount listed on it through myGov.

A FHSS withdrawal is only available once, so it’s important to be aware of all the details before deciding to go ahead.

When should I check my super account?

Superannuation funds typically provide an account update once per year, around October (although it does vary). So you should review your account at least once a year when you get this update.

When you do, make sure you check:

  • The total balance of your account
  • The total fees charged
  • The investment returns
  • What investment option you have for your account
  • Your projected balance at retirement

These details are typically included on your super account statement, making it easy to review them.

But if you have more questions or are overwhelmed, The Golden Years authors Jamie Nemtsas and Drew Meredith both recommend being proactive about finding more information. In fact, it’s one of the reasons they wrote the book.

“There are also the various chat groups, podcasts, online resources or visiting a financial adviser,” Drew says.

“Most people we meet are actually in a better position than they think, but have never asked the question.”

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