How superannuation works: Step-by-step guide

The summer break presents a great time to slow down, think and catch up on many things we’re too busy with during the year. One of them is our finances. We know from our members that many find superannuation too confusing for words. So today we’re taking the time to share a step-by-step super explainer. One that you can read as many times as you choose. One that you can share with friends or family who also struggle to understand all the details.

Part of the difficulty seems to arise in the spending phase. It’s relatively easy to remain passive when your employer is handling the main contributions. But come retirement it’s you who is in charge and responsible for the financial outcome. That said, we believe the earlier you engage with your super the better. That’s because understanding this significant pool of savings means you increase the likelihood of growing it faster. And ending up with more retirement income as a result.

So why not commit now to making 2024 the year that you embrace the challenge of understanding your super and making it work super hard on your behalf?

Let’s start right now!

What is super?

Superannuation, or ‘super’, is money put aside by your employer over your working life as a way of saving for retirement. You may have also contributed to super yourself through personal contributions or a salary sacrifice arrangement. 

It is compulsory for all employers to make contributions for employees regardless of how much they are paid. Employees under 18 must work more than 30 hours in a week. Before 1 July 2022, employers only needed to pay super if you earned $450 or more (before tax) in a month. Employers pay a legislated 11% (Called the Superannuation Guarantee’ SG) contribution (of the employee’s earnings) into their super account.  The super fund invests the money based on the investment option chosen by, or relevant to, the member.

How much super should you have saved?

As the saying goes, comparisons are odorous. Comparing your own super balance to that of others is rather futile. Managing your savings in the best possible way is how to proceed. That said, we all like to benchmark where we sit, compared to others of our age and life stage, so here is a recent snapshot of both median and average super savings for Australians of retirement age. 

Median Super at retirement 2021 (age 65-69)

Male	$213,986
Female	$201,233

Average Super at retirement 2021 (age 65-69)

Male	$453,075
Female	$403,038

(source ATO taxation statistics 2020- 2021 Financial Year)

Types of Funds

Most Australians now have their funds in an Accumulation fund. A minority may have Defined Benefit Funds (DBFs), but these are largely restricted to the public service and becoming much less common. 

Self-Managed Superannuation Funds (SMSF) are also an accumulation fund. They have very different, specific rules. The following information does not cover SMSFs, Public Sector, Corporate Funds nor Defined Benefit Funds. 

Options for contributing to super

Contributions can be made to superannuation a number of ways, with restrictions on maximum amounts and ways of contributing including: 

Before-tax contributions

‘Before-tax’ money, (often referred to as ‘concessional contributions’), are contributions made before tax is taken out, or when you may be eligible to claim for a tax deduction. There are a number of different types of ‘concessional contributions’:

• Employer, or Superannuation Guarantee (SG), contributions are made by your employer before tax is deducted. You don’t need to make these contributions yourself as your employer is obliged to make them for you, but they will count toward the limit of total ‘concessional contributions’ you can make in a year.
• ‘Salary sacrifice’ contributions, where you ask your employer for some additional funds to be contributed to super prior to income tax being taken out.
• ‘Personal concessional contributions’, when you make a contribution to super from your own savings, but then you complete the required form to claim a tax deduction for this amount before you complete your tax return for the year. Note: A work test still applies to individuals aged between 67 and 75 years old who wish to claim a deduction for personal superannuation contributions.

The total combined amount of all of the above types of contributions can’t add up to more than $27,500 per annum from financial year 2021/2022 onwards (unless you are eligible to make extra contributions under the carry-forward arrangements effective from 2019-2020).

After-tax contributions

‘After-tax’ money, using money from your bank account to contribute to your super fund and you don’t claim a tax-deduction for it.  This type of contribution is referred to as a “Non-Concessional Contribution” or “Personal Contributions”. The maximum amount is $110,000 per annum effective 1 July 2021.

However, your own maximum might be different. It can be:

• higher, if you can use the bring-forward arrangements, 
• or nil, if your total super balance is greater than or equal to the general transfer balance cap of $1.9 million from 1 July 2023.

Additional ways to contribute to super 

There are other ways you can add to your super savings:

• Spouse contributions – your spouse makes a contribution for you; it counts towards your non-concessional contributions cap not that of your spouse.
• Super Co-contribution scheme – low or middle-income earners who meet eligibility requirements, make a personal (after-tax) super contribution. The government makes a contribution (called a co-contribution) up to a maximum amount of $500.
• Downsizer Contribution – requires specific age and eligibility requirements to be met. 
• Low-income super tax offset (LISTO), this is a government superannuation payment of up to $500 to help low-income earners save for retirement.  The maximum payment you can receive for a financial year is $500, and the minimum is $10. (ATO Website). You don’t need to do anything to receive a LISTO. Just make sure your super fund has your tax file number (TFN) – without your TFN, your super fund cannot accept a LISTO payment.
• Carry-forward concessional contributions – arrangements involve accessing unused concessional cap amounts from previous years. The amount of unused cap amounts you will be able to carry-forward depends on the amount you have contributed in previous years, (from 2018–19).  You also need to meet two other requirements to be able to use the carry-forward arrangement.

Tax on super

The tax you pay on your super contributions varies. It generally depends on whether:

• Contributions are concessional (were made before tax, i.e. SG), or after you paid income tax (non-concessional). 
• if you exceed the super contribution caps, or 
• you are a high-income earner.

When can you access your super?

You can withdraw your super:

• when you reach Preservation Age and retire, (between 55 and 60, depending on when you were born)
• when you reach age 60 and cease one work arrangement and commence another, even if you do not declare retirement, or
• when you turn 65 (even if you haven’t retired)
• under the ‘Transition to Retirement’ rules (TTR), while continuing to work.

Additionally, there are some very limited circumstances where you can access your super early. These circumstances are mainly related to:

• specific medical conditions, 
• severe financial hardship, 
• the First Home Super Saver Scheme.

Your Preservation Age is not the same as Age Pension age. 

Your Preservation Age is the age at which you can access your super if you are retired (or have started a Transition to Retirement income stream). 

Your Preservation Age depends on when you were born. If you were born before 1 july 1964 you need to be at least age 59 and if you were born after that date your preservation age is 60

How are super withdrawals taxed?

The amount of tax you may be required to pay depends firstly on the age at which you access super. Any withdrawals after the age of 60 are generally tax free where you are eligible to withdraw. 

If you are accessing super prior to age 60, but after your Preservation Age, the tax will depend on whether you withdraw your super as:

• a super income stream, or
• a lump sum

Any lump sum withdrawals made under hardship grounds may be subject to more significant tax consequences. 

Everyone’s financial situation is unique, especially when it comes to tax. So, it’s important to make an informed decision, seeking financial advice as needed, before you decide to withdraw your super.

How super combines with the Age Pension 

Superannuation is counted under the assets test (total fund balance) and included in the deemed income calculation when you are eligible to claim for an Age Pension. If a person is applying for Age Pension and has a younger partner who is not age eligible, then the younger person’s superannuation, if held within accumulation phase of super, is not counted by Centrelink under either the Assets or deemed Income tests.

What about Commonwealth Seniors Health Card (CSHC) entitlements

Superannuation is not included in the eligibility assessment for Commonwealth Seniors Health Card regardless of you or your partner’s age.  Superannuation will only be included where it has been converted to an income stream.

What options are available to you to use your super?

You have the choice of what you want to do with your super once you meet the eligibility requirements to access super:

• You can leave it in your super fund and request ad hoc lump sum withdrawals.
• You can convert it into an income stream product to provide you with ongoing tax free income (there is no tax on the earnings), or
• You can take it out of the superannuation environment, however it is very hard to put back in if you want to do so at a later date. 

There are many pros and cons to all of the above options. It’s best to seek advice and do some scenario planning in an Understanding more about Super consultation to ensure you make the best decisions for your own specific circumstances.

Super funds and insurance. 

It’s important to be aware that your super most likely has insurance included.

You may need to keep the fund to retain the insurance due to your personal circumstances or family situation. But insurance premiums can be expensive and eat away at your super balance.  It’s important to review your insurance needs and it may be worth getting independent professional advice before you make any changes with your super account.

Whilst your fund may hold insurance cover, some cover ceases prior to or by the time a person is of Age Pension age.

Fully understanding your super options is one of the most powerful ways to gain control of retirement finances. The Retirement Essentials Understanding more about Super consultation will help you do just this.

Have we missed anything?

This is a long step-by-step explanation, so we hope that we have covered your main questions about super. But, as always, we are here to help further if you have any extra questions. Just comment below.