Superannuation is Australia’s compulsory retirement savings system, and for most Australians it will be their single largest financial asset by the time they retire. Yet despite how important it is, most working Australians spend almost no time thinking about it until it is too late to make a significant difference.
The good news is that making smart decisions about your super does not need to be complicated. Even small changes made early in your working life can result in tens of thousands of extra dollars in retirement. This guide explains how superannuation works in Australia, how to choose the best fund, and what you can do right now to maximize your balance.
How Superannuation Works in Australia
Superannuation is a government mandated savings system designed to ensure Australians have enough money to retire comfortably without relying entirely on the Age Pension. Your employer is legally required to contribute a percentage of your earnings into a super fund on your behalf.
As of the current financial year, employers are required to pay 11 percent of your ordinary time earnings into your super. This is called the Superannuation Guarantee, or SG rate. This rate is scheduled to increase to 12 percent by 2025.
For an Australian earning AUD 80,000 per year, that means approximately AUD 8,800 per year flowing automatically into their super fund. Over a 40-year working life, combined with investment returns, this can grow into a very substantial sum.
Your super is held in a trust structure managed by a superannuation fund, not accessible until you reach your preservation age. Currently this is between 55 and 60 depending on when you were born, with most Australians accessing their super at age 60.
Choosing the Best Super Fund in Australia
Not all superannuation funds are created equal. The performance difference between a good super fund and a poor one can amount to hundreds of thousands of dollars in retirement. Here is what to look for when comparing funds.
Investment returns: Look at 10-year performance rather than one or three year returns. Short term performance is largely due to luck, while long term performance is a better indicator of fund quality and management. The ATO’s YourSuper comparison tool allows you to compare returns across Australian funds.
Fees: Super fund fees come in several forms including administration fees, investment fees and advice fees. Total fees for a MySuper product should generally be under 0.85 percent per year of your balance. Fees higher than this are difficult to justify for passive investment options.
Investment options: Look for a fund that offers a range of investment options from conservative to high growth, and ideally one with low cost index fund options. Many of Australia’s best performing super funds have adopted index fund investment strategies.
Insurance: Most super funds offer life insurance, total and permanent disability insurance and income protection insurance. Check what cover your fund includes and whether it represents good value.
Financial health of the fund: Larger funds generally have more resources and better negotiating power with investment managers. Check that any fund you consider has a strong financial position.
Some of the consistently well-regarded super funds in Australia include AustralianSuper, Hostplus, Australian Retirement Trust and UniSuper, though you should compare these directly using the government’s YourSuper comparison tool rather than relying on any single list.
The Difference Between Concessional and Non-Concessional Contributions
One of the most valuable things you can understand about super is the difference between the two types of contributions.
Concessional contributions are made from pre-tax money. Your employer’s SG contributions are concessional. So are salary sacrifice contributions, where you ask your employer to redirect part of your salary into super before tax is applied. Concessional contributions are taxed at just 15 percent inside super, which for most Australians earning over AUD 45,000 is significantly lower than their marginal tax rate. The annual concessional contribution cap is AUD 27,500.
Non-concessional contributions are made from after-tax money. You make these yourself from your bank account directly into your super fund. They are not taxed when they go in because you have already paid tax on the money. The annual non-concessional contribution cap is AUD 110,000, or up to AUD 330,000 over three years using the bring-forward rule.
The Most Powerful Super Strategy: Salary Sacrifice
Salary sacrifice is one of the most underused and most powerful strategies available to Australian workers. By redirecting part of your pre-tax salary into super, you reduce your taxable income and boost your super at the same time.
Here is a simple example. If you earn AUD 100,000 and salary sacrifice AUD 10,000 per year into super, you reduce your taxable income to AUD 90,000. At the 32.5 percent marginal rate, this saves you AUD 3,250 in income tax per year. The AUD 10,000 going into super is only taxed at 15 percent (AUD 1,500), so your total tax saving is AUD 1,750 per year.
Over 20 years with investment returns, this simple strategy can add hundreds of thousands of dollars to your retirement balance.
How Super is Invested
Your super fund invests your money on your behalf in a range of asset classes. The default investment option in most Australian funds is called a MySuper product, which is typically a balanced or lifecycle investment strategy.
Most funds offer additional investment options that you can choose from. Common options include:
High growth: Predominantly invested in shares, both Australian and international. Higher risk but typically higher returns over the long term. Suitable for members who are many years from retirement.
Balanced: A mix of growth assets like shares and defensive assets like bonds. Moderate risk and return. The most common default option.
Conservative: Predominantly bonds and cash. Lower risk but lower returns. Suitable for members approaching retirement who cannot afford a significant market downturn.
Indexed options: Many funds now offer index fund investment options that track market indices at very low cost. These are often the best choice for cost-conscious super investors.
When Can You Access Your Super
Your super is preserved until you meet a condition of release. The most common is reaching your preservation age and retiring. Your preservation age depends on when you were born. For Australians born after 30 June 1964, the preservation age is 60.
Once you reach 65, you can access your super regardless of whether you have retired.
If you are under 65 but have reached your preservation age, you can access your super via a transition to retirement income stream, which allows you to draw some income from super while still working.
There are limited circumstances where you can access super early, including severe financial hardship, a terminal medical condition and certain compassionate grounds.
How Much Super Do You Need to Retire in Australia
The Association of Superannuation Funds of Australia, ASFA, publishes retirement standard benchmarks that give a useful guide. As of recent figures, a comfortable retirement for a single person requires approximately AUD 595,000 in super, while a couple needs around AUD 690,000.
These figures assume you own your home outright at retirement and supplement your super with the Age Pension.
For a comfortable retirement without relying on the Age Pension at all, most financial planners suggest aiming for a super balance of AUD 1 million or more.
Self Managed Super Funds
A self managed super fund, or SMSF, allows you to manage your own super investments rather than using a fund. SMSFs have become popular among Australians who want more control over their investment strategy, including the ability to hold direct property inside super.
However, SMSFs come with significant responsibilities. You become a trustee and are personally responsible for compliance with superannuation law. Fees, legal requirements and ongoing administration make SMSFs most suitable for balances above AUD 500,000 where the costs are justified.
Check Your Super Today
The most important thing you can do right now is to know where your super is and what it is invested in. Many Australians have multiple super accounts accumulated from different jobs, each with its own set of fees eating away at their balance.
Log in to myGov and link your ATO account to see all your super funds in one place. If you have multiple accounts, consider consolidating into one fund to eliminate duplicate fees.
Then review your investment option. If you are young and have decades until retirement, check whether you are in a high growth option that gives your money the best chance to grow. If you are in the default balanced option and are under 40, switching to a higher growth option could significantly increase your final balance.
For more on Australian retirement planning, read our guide to how much super you need to retire and our comparison of the best super funds in Australia.
This article is for educational purposes only and does not constitute financial advice. Superannuation rules are subject to change. Please consult a licensed financial adviser or your super fund for advice specific to your situation.