Key terms you should know about superannuation
Australian businesses are required by law to make contributions to employees’ super funds, where it is invested on our behalf by professional investment managers for continued growth.
Depending on your level of income, if you make after-tax contributions to your super fund, the government may match it with tax-free money into your super fund. The rates and contributions vary, so it’s worth checking with the ATO each financial year.
Apart from ongoing contributions, your superannuation grows through the magic of compound interest. Put simply, the interest it earns is added to the total, which then earns more interest – and this can add up to a considerable amount over time.
Every employer in Australia is required by law to contribute an amount equal to (at least) 9.5% of an employee’s salary into a super fund account, on top of their wages.
Ordinary time earnings (OTE)
Calculation of employer contributions is based on ‘ordinary time earnings', or what is earnt for ordinary hours of work including over-award payments, bonuses, commissions, allowances and certain paid leave, but not overtime.
It’s possible your employer’s contributions may not be sufficient to build the retirement nest egg you’d like, so you can boost it with your own contributions. These can be pre or post-tax – both carry benefits, so ask your financial adviser which option suits your circumstances.
This is the minimum age for which your super must be ‘preserved’, as set by law. For most people born after 1 July 1964, the earliest age you can access your superannuation is 60.
Salary sacrificing means you arrange for your employer to pay more of your pre-tax salary into your superannuation account, above the mandatory 9.5%.
It’s a popular strategy because any salary that’s ‘sacrificed’ pre-tax to super is taxed at 15% – considerably less than the normal rate. If you are a 35-year-old male earning $85,000, and choose to sacrifice just $200 a month to super, your annual net pay will be reduced by $2,400 but your super will be boosted by $3,114 – and with compound interest that could make a big difference over 30 years.
Self-managed super funds (SMSF)
SMSFs are small, personal super funds, established by individuals who want greater control and flexibility over their super – and have the time and knowledge to do so. They can have no more than five members, one of whom is the trustee who manages, makes investment decisions and takes full legal responsibility for the fund.
Your superannuation is paid into a super fund that manages and invests your money in order to ensure it continues to grow each year.
The Superannuation Guarantee is a compulsory superannuation scheme for employees. It was introduced in 1992 to ensure all Australians have an adequate income after they retire, together with the pension, personal savings and investments.
It’s worthwhile getting to know your superannuation and working out how to make it grow – your future retired self will thank you.
Compare self managed super funds now.