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What is super and how does it work?

22 January 2019

Money & Life team

Money & Life contributors draw on their diverse range of experience to present you with insights and guidance that will help you manage your financial wellbeing, achieve your lifestyle goals and plan for your financial future.

Most countries around the world provide some sort of income to support their older residents in retirement. So how does the Australian system provide you with money to live on when you’re no longer earning?

What is superannuation?

Superannuation has been around since the 1860s when a few private and public sector companies saved into a retirement fund on behalf of their salaried employees. But in those days, you wouldn’t benefit from any income from those savings unless you kept working for the same employer.

Fast forward about a century to the 1980s when the Labour government took the first steps towards the universal superannuation system we have today. In 1986, an industrial awards agreement between the Hawke Federal Labour Government and the Australian Council of Trade Unions (ACTU) came into effect. Under the agreement, union members chose to forgo a three per cent pay rise in return for equivalent ongoing payments into their retirement funds.

However, this arrangement didn’t cover all Australian employees. So in 1992, the Superannuation Guarantee (SG) came into legislation, making it mandatory for every business and organisation to pay a contribution to their employees’ retirement savings at an agreed rate. Since then, each government has added policy reforms aimed at improving the effectiveness of what has become a huge industry and savings pool.

Is super my only source of income for retirement?

In Australia we’re not expected to rely solely on our superannuation savings for retirement income. Back in 1908, the taxpayer-funded Age Pension was introduced and many Australians have relied on this income to provide for their retirement lifestyle ever since. But as the proportion of Australia’s population over age 65 becomes larger and can expect to live longer, the cost to the government of funding an Age Pension for everyone may become unsustainable. And so the SG was introduced as one of the three ‘pillars’ of the retirement income system we have today.

So in summary, your retirement income could be coming from one or more of the following:

– Age pension – means tested and paid to you by the government from tax revenue

– Your super savings – paid by your employer and held in one of many super accumulation funds or in a Self Managed Super Fund (SMSF).

– Your savings and investments held outside of super.

Who pays my super?

If you work for an income, your employer is required by law to pay your SG contributions at least once a quarter. Whether you’re full or part-time, salaried or casual, if you receive more than $450 per month in wages or salary, you’re legally entitled to these SG payments.

Your savings in super don’t have to be limited to employer contributions only. You also have the option to make extra contributions to your super fund or SMSF on a voluntary basis, whether you’re working or not. And you may benefit from tax concessions on some or all of these personal payments into your super.

When you’re self-employed as a sole trader, you may not be obliged to pay yourself any super. This could have a big impact on your future income in retirement so give some thought to making voluntary contributions into a super fund of your choice.

How is my super calculated?

The current SG rate is 9.5%, so your employer must pay a minimum of 9.5% of your ordinary time earnings (OTE) as a contribution to your super[1]. OTE includes any payments you receive for your ordinary hours of work – your salary, commissions, shift loadings and allowances, but excluding overtime payments.

According to current government policy, the SG rate[2] is scheduled to rise to 10% on 1 July 2021. The rate will then continue to increase by 0.5% each year (10.5% in 2022, 11% in 2023 etc.) until it reaches 12% on 1 July 2025.

Where is my super?

Most employers offer a default super fund for your SG contributions, but you also have the option to go with a different super fund at any time. Depending on the type and size of the fund you’re with, you’ll also have a number of investment options. The way you decide to invest your money will depend on lots of things, including how long until you retire and your tolerance for risk.

When you change jobs, you can usually stay with the same fund or switch to a different one offered by your new employer. As you move from job to job, you may end up with more than one super fund. As these are savings you can draw on for your income in retirement, it’s important to know where they are. It can also be worth looking at bringing multiple super accounts together to save you from paying too much in fees.

When will I receive my super?

According to current legislation, you can access your super when you reach your preservation age. There are some special circumstances where you can draw on your super earlier, including the First Home Super Saver Scheme.

Looking for more tips to help you plan for your career and retirement? Our Work & Retirement section on Money & Life has a wealth of information on work, super and much more.


[1]Australian Taxation Office, Working out if you have to pay super

[2] Australian Taxation Office, Super Guarantee Percentage,