A Plain English Guide to Superannuation
Superannuation. Every working Australian has it, but many aren’t sure exactly how it works or why they need to know about it. In this article we look at why superannuation is important for you, how it works, and how you can choose a great super fund to secure a sustainable future.
What is superannuation?
Superannuation is money set aside by your employer over your working life that acts as a savings system for retirement. The money that is held in your super account is then invested in assets to yield returns for your eventual retirement. What your money is actually invested in during that time depends on your super fund’s portfolio of investments.
Why is super important for every Australian?
When you first enter the workforce, there’s a certain rush that comes with your pay cheque. After all, money buys you the freedom to do the things you want, have the things you want, and afford the type of life you want to live.
But when you retire, you don’t have access to the same income. You cease working, and that means your regular income stream stops also. But just because you’re retired doesn’t mean you should settle for second best. That's why it's essential you make smart choices with your super today, so you can have a brighter future tomorrow.
You want a long, happy retirement
Best case scenario, your retirement lasts for a long time. During retirement, you're reliant on superannuation (and personal investments) to 'pay your way’. The amount of super you will need to last your retirement depends on several factors, including:
How long you live
The type of lifestyle you want (travel, holiday houses etc.)
Any future medical costs
Many Australians underestimate just how expensive retirement can be. You will have to consider increased medical costs, rising costs of living, and account for unexpected expenses – all without a reliable source of income.
The Association of Superannuation Funds of Australia (ASFA) estimates the total amount required to support a comfortable lifestyle for a single person is $545,000, and $640,000 for a couple (assuming they receive a partial Age Pension.)
The Age Pension probably won't be enough
The Age Pension is an allowance paid to eligible Australians over the age of 65. To become eligible for the pension you will have to declare your income and assets, which will be used to determine how much you are entitled to receive.
For most people, the Age Pension alone is not sufficient to fund a comfortable retirement. This is why a substantial superannuation balance is so important.
It's one of the best ways to save over the long term
Smart investing can reap benefits, and superannuation is one of best strategic investments you can make. Tax concessions provided to super funds give them a competitive advantage, and, because super funds manage the wealth of thousands of individuals, they have advantages in scale and diversification you might find hard to achieve as a single investor.
That’s why you need to track down lost super
One of the biggest concerns for Australia is is tracking down lost super. Through the course of our lives most of us will work across a number of different companies, even industries. As most employers have a default super fund, that means super can often end up spread around multiple funds. That means more fees and less super in the long term.
According to the ATO there’s currently almost $18 billion of unclaimed super in holdings by super funds and the ATO. To find your lost super you can use this super tracking tool provided by the Australian Tax Office.
How does super grow?
When you work, a portion of your earnings are contributed by your employer directly into a superannuation fund. The government sets a mandatory rate of 9.5%, but you can contribute more if you want to. These extra contributions will only be taxed 15% up to an age dependant cap.
Your super contributions are invested by the managers of your super fund into things like shares, property, government bonds and cash deposits.
While you don't have direct control over these investments, their growth means greater financial gain in the future. A good super fund grows its investment, meaning more money in retirement.
How to choose a super fund
Choosing a superannuation fund can be tricky, particularly if you don't know a great deal about how superannuation works. Here's a few pointers on choosing the right fund.
Compare fees and costs
Look at past performance
Compare the positive and negative impacts of a super fund
Compare fees and costs
Superannuation funds have charges and fees associated with them that can eat into your super. This is one of the most important reasons why it's better to consolidate your superannuation into one fund, rather than have it spread across several super funds. Small amounts of super will quickly be eaten up by fees across multiple providers, particularly once contributions stop.
Consider the following when assessing costs between super funds:
Annual administration costs
Taxes
Any charges for not meeting a minimum contribution
Performance of the fund
Superannuation insurance
Fees for access
Many Australians – especially when first starting in the workforce and moving from job to job – don't consider just how quickly multiple funds and fees can eat into their super base.
Look at past performance
While past performance isn't a guarantee of future success, it can be a good metric for seeing how funds perform over time. Look for longevity in performance. Funds that perform well only in the short term might have exorbitant fees, so it’s important to strike a balance between fees and performance.
Assess positive and negative impacts of superannuation
One area where your superannuation can contribute is to help drive investment in ethical and sustainable industries, while putting a stop to damaging and unethical business. While you can't invest directly like you might with your own personal investments, your choice of fund can play a role in which industries thrive in Australia.
When considering which super fund is right for you, be sure to consider how they invest. Did you know your super could be invested in harmful industries like armaments, gambling, tobacco or fossil fuels? By taking the time to research what your super fund invests in, you can make a conscious choice as to what your money contributes to.
Funds like Future Super, which only invest in businesses that pass a strict ethical screens test, are helping secure a cleaner, healthier future. By switching your super to Future Super, you're actively helping change the face of Australian business, for the better.
Want to know more about how ethical superannuation funds can work for you? Here's 5 more reasons to care about where your super goes.
How do you know if a super fund is ethical?
The best way to discover if your super fund is an ethical fund is to look at where they invest your superannuation. For example:
Do they invest in sustainable energy? Future Super invests in NextDC data centers. Their Melbourne data center is home to the largest privately owned PV solar array.
Do they invest in ethical businesses? Future super invests your superannuation in Teachers Mutual Bank, which has been voted one of the World's Most Ethical Companies.
Are their investments future proof? Future Super invests in Tesla, one of the world's most forward thinking companies.
You should also look at what they screen out. At Future Super, every company that makes it onto our portfolio goes through a rigorous ethical screening process. We won’t invest in companies engaged in a number of activities, such as fossil fuel production, live animal exports, gambling, tobacco, nuclear and armaments, corruption, slave labour and more.
It’s important to look for transparency, too. Many super funds will only disclose their 10 largest holdings, meaning there are entire areas of their portfolio kept in secrecy.
Understand super to secure your future
Although superannuation is mandatory in Australia, it’s often an investment that goes overlooked. By understanding how super works you can make more informed decisions as to where your money goes, and what it contributes to.