How super works
If you’ve ever had a job, then super is going to be on your radar. Knowing what it’s all about is the first step to making it work for you.
What is super?
Superannuation (super for short) is your savings for your time in retirement. It’s a sum of money you can spend when you’re no longer earning an income from paid work.
Super is your savings account for retirement. But well before you retire, your balance could be in the hundreds of thousands of dollars. While you can’t spend it now, a sum of money that big has got to be important to you. So it makes sense to know how it works and what you can do with it before you retire.
Where does super come from?
When you’re working, your employer is usually required by law to pay a certain percentage of your salary into your super. This is called the Superannuation Guarantee (SG) and right now that amount is 11% of your salary. And the good news is that it’s going up by 0.5% each financial year until 1 July 2025 when you’ll be getting 12% saved into your super for each dollar you earn.
These SG savings aren’t taken out of your salary like income tax. Super contributions are an extra amount included in your employment package that your employer saves into your super fund on your behalf.
What happens to your super?
Super is your money and you get to control what happens to it, within certain limits. This starts with choosing a super fund which is similar to a savings account, except you can only withdraw the money under certain circumstances.
Just like your employer is legally responsible for paying your SG contributions, super funds have a responsibility to look after your money and help you invest it so your savings can grow faster. They get to charge fees for doing this, which are paid straight from your super account.
Why do you need super?
When you retire, you may be able to get some income from the Age Pension, an income support payment from Centrelink. But depending on your plans for retirement, how much you spend from day-to-day, and whether you rent or own your own home, the Age Pension may not be enough.
Your super savings are there to give you the income you need to choose how you want to live in retirement. It can come in handy before you retire too. Super can help you learn about investing, and even help you save for a home. Keep reading to find out more.
Super doesn’t have to just sit there, waiting for you to spend in retirement. It can actually work really hard for you and help you get ahead in more ways than you think, like saving for a home.
Super power: 4 amazing things you can do with your savings
Invest It
Why make investment choices in super when it’s easier to just get on with life?
Here are three great reasons:
Your super is a lot of money – unless you’re a champion at choosing to save money from your income, super is likely to grow into the biggest savings balance you’ll have in your lifetime. Why wouldn’t you make the most of it?
Expert tip:
“Want to get the hang of investing without the pressure? Super is the perfect sandbox for getting comfortable with investing when you don't have experience or spare savings to invest. Depending on your age you may be able to 'learn as you go' and get to understand what investment risks mean to you.” - Josh Rundmann, from the IOOF super team
2. Super funds make it easy to invest – super funds are required to have an investment strategy and make decisions they believe are in the best interests of their members. This means they do a lot of the work for you in coming up with investment options that suit your needs when it comes to taking risks and earning a decent return. It doesn’t mean there’s no risk and you can still lose your money though, so be sure to understand any investment decision before you make changes.
3. Compounding is the easiest money you’ll ever earn – Thanks to the magical multiplying effect of compounding, every extra dollar added to your super savings from your investments is another dollar that can earn you even more.
Save it for… A Home Deposit
If retirement seems too far away, there could be another goal on your list your super savings can help with. You can’t put it towards a car or your next big trip overseas, but what if you could save faster for your new home through your super?
The First Home Super Saver Scheme (FHSSS) could see you on your way to owning your first home sooner:
You can make extra payments into your super and keep them there until you’re ready to buy.
While you do this you can be saving on tax – both on the money you’re earning from investing your super savings which is taxed at 15% and from the tax you could save by making extra payments into super from your pre-tax salary – these are called concessional or salary sacrificed contributions. Find out more about making extra super payments.
Unlike a savings account which earns a fixed rate of interest, you can choose how to invest your super for a better return so your savings have the potential to grow faster.
Save it for… A Rainy Day
As we’ve seen during COVID-19, financial hardship can affect people for the most unexpected reasons.
And during the early months of the pandemic, the Federal Government made it possible for people to withdraw their super if they had lost their income and didn’t have savings to fall back on and pay their bills.
The window for this early withdrawal of super has closed now. But there are some other circumstances where you can apply to the ATO to access a limited amount from your super before retirement when you are in need of financial help to:
Stop you from losing a home you own because you can’t pay the mortgage or council rates
Cover the cost of medical treatment, palliative care and/or disability services for you or a dependant
Cover the cost of a funeral or burial arrangements for a dependent.
You can also apply to your super fund for early access if you:
Are experiencing financial hardship and can’t pay basic expenses for you and your family.
Have a terminal illness, conditions would apply.
Become incapacitated either, temporarily or permanently, if you have the appropriate insurances in your super.
Both the ATO and your super fund have strict conditions around any claim you make for early access for any of these circumstances. Your super fund can help you find out if you may be eligible for early access and how to make a claim.
Save it for… a better future for yourself and your family
Money that you can’t get your hands on now is easy to ignore. But even if you can’t spend it now, chances are you’ll be spending it someday. And the more money you have the more freedom you’ll have to spend it as and when you wish.
If the future you’re looking forward to is cut short, your super is a big part of the wealth you can pass on to your family or loved ones. And unlike other assets like your savings, property or investments, you can nominate the person or people you prefer to receive your super death benefit.
Source: IOOF