How does Superannuation Work (Employee)?
Super is our friend - a very, very long term friend. Learn about what it is and how to utilise it to its best capacity.
Typically, most people don’t work through the entirety of their life to their last living days on Earth (unless you’re Steve Jobs and your life is your work). No – instead, people settle down and enjoy the simpler things in life without worrying about the hussle and bussle of working life.
However, not working means no income from a job. In order to reach that light at the end of the tunnel (a.k.a. retirement), we must regularly set aside funds into our superannuation account.
What is Superannuation?
Superannuation (often shortened to super) is a term used to describe compulsory payments made to a ‘super fund’ on a regular basis for your long savings.
Super contributions are compulsory by law (employees over 18 years old). The payments are made by your employer to ensure regularity. However, these payments are not additional to your income, they are deducted from your weekly salary.
Generally speaking, you will have access (permitted to withdraw) to your super fund when you retire which will be discussed below.
For the 2015/2016 and 2016/2017 financial years the compulsory contribution rate is 9.5% of an employee’s annual income.
Do I Pay Tax on My Super?
Normally, super will be taxed at 15% which would usually be less than your marginal income tax rate.
Can I Voluntarily Contribute to My Super?
Ideally, you should voluntarily top up these payments made into your super fund for maximum growth. Of course it must be stressed that you do not have to add extra money on top of what is provided by your employer. Although, as an added incentive to voluntarily contribute to your super fund, the government will tax super contributions less than similar non-super investments. For instance, the money that you make from your super fund will be taxed less than money made by other means. This is still the case even if you invested in the exact same investments.
When can You Withdraw from Your Super Fund?
You can access your super in any one of three ways:
- When you turn 65 years of age, regardless of whether or not you have retired;
- When you reach ‘preservation age’ and retire (the minimum age set by the government, dependent on your birth date as seen in this table); or
- When you reach your preservation age and choose to continue to work.
When you are able to qualify to access your money, you can choose to get your super in any of the following three ways.
First, as a lump sum for you to spend however. Second, as an income stream (such as monthly installments). Third, as a mix of the first two – a partial lump sum and the remainder as regular payments.
The second and third options of receiving money in installments is ideal because it allows the remainder of the money to continue to grow for you through interest earned.
Choosing the right amount of super to aim for down the track will depend on your personal circumstances.
This could include your age, income, lifestyle and ideal retirement age. You will need to sit down and consider all these factors to be confident that you can completely rely on your future super income.
How to Set-up Your Super
As an employee you can nominate your own super fund of choice. If you do not nominate your own fund, your employers will generally have a default super fund which they will contribute to.
We all aspire towards financial freedom one day, superannuation, if done correctly is one of the ways to get us there. Superannuation impacts all Australians and a significant part of our lives. Make sure you know how to make the most of your early savings to be able to enjoy retirement the way you envisioned.
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Anthony is a Paralegal at Lawpath. Pursuing his interest for Insolvency and Commercial Law, he is currently completing his third year of a combined degree in a Bachelor of Laws/Bachelor of Commerce at University of New South Wales.