A superannuation fund or 'super fund' is a sum of money set aside during one's employment to serve as a retirement fund. In Australia, superannuation has a compulsory scheme in which employers are required to put a portion of each employee's salary into a super fund which becomes accessible upon retirement. Contributions must be made at least every three months for a super fund. The rate of contributions is determined by the government.
Employees can also choose to make additional contributions to their super fund, or set up their super fund in a trust so that the benefits can be distributed to their beneficiaries. Independent contractors and other self-employed individuals can set up a super fund on their own with banks or private financial institutions, making contributions at their own rates and schedules.
In a typical super fund, the bulk of the benefits is made up of the compulsory contributions made by the employer. The rest consists of the earnings from investing the fund, and voluntary contributions, if any. The taxes and any administration or setup fees are deducted from the total benefit, except in a few tax-exempt or tax-deductible situations. The latter may also be shouldered by the employer or deducted from the employee's salary.
How super fund works
A super fund can fall under one of three categories: preserved benefits, unrestricted non-preserved benefits, and restricted non-preserved benefits. Preserved benefits have to be retained in the super fund until a certain ‘preservation age,' which is currently age 55. This rule applies to all contributions placed after 1 July 1999.
Restricted non-preserved benefits can only be accessed when you meet certain conditions of release, which may vary from one super fund to another. A common condition is the termination of employment with the company making the contributions. An unrestricted non-preserved benefit can be accessed any time you want without having to meet these requirements.
A concessional tax of 15% applies to all super fund benefits earned in all three schemes. The tax is imposed at three points: first on the contributions, then on the earnings made from investments, and finally on the payout of the actual benefit. An exception is when you are over 60 and your super fund is from a taxed source, such as regular income.
Why you need a super fund
Besides that fact that it's compulsory, a super fund is necessary to ensure a stable financial resource for both you and your family. While you can do the same by contributing to a savings account, the benefits are much larger and the potential yield much higher in a super fund. If you choose to, you can also manage your own investments and have better control over your money.