What it means
Each time an employee is paid, the employer must contribute an additional amount, calculated as a percentage of pay, into a super fund. The percentage is set by law and can change, so employers need to check the current rate with the tax authority.
Employees can often add their own contributions as well. The fund invests the money in shares, bonds, property and cash, and the balance grows with contributions and investment returns.
Members usually choose from several investment options, such as a growth option with more shares or a cautious one with more bonds and cash. Fees and investment performance both matter, because over decades small differences compound into large sums.
Access to the money is restricted. Members can normally draw on it only after reaching a preservation age and retiring, or in limited cases such as serious illness.
The restriction aims to ensure that the money is available in later life, though it means the savings are not available for other needs. For employers and finance teams, the main tasks are working out the correct contribution, paying it on time and reporting it accurately.
Late or missing payments can lead to penalties and extra charges, so the payroll system needs to be reliable. Contributions are generally a deductible business expense, which reduces the employer's taxable profit.
The nuance is that the word is used in different ways in different places. In Australia it means the whole compulsory system, while in some other countries the term has been used for occupational pension schemes more generally.
Anyone working across borders should check the rules of the country involved rather than assume they are the same.
In practice
Real-world examples.
Example
A hospitality company with 120 employees calculates its super contributions each month as a percentage of ordinary pay. The payroll manager pays them to the employees' chosen funds before the deadline to avoid penalties.
Example
A 35-year-old consultant checks her super statement and finds she is paying 1.2% a year in fees. She compares funds and moves to one charging 0.6%, which on a $200,000 balance saves $1,200 a year.
Example
A small business owner who is self-employed makes extra voluntary contributions near the end of the tax year. His accountant explains that there are limits on how much can be paid in at favourable tax rates, and that the amounts need to be tracked.
Formula
Calculation
Employer contribution = salary x contribution rate
Future value of regular year-end contributions = annual contribution x ((1 + r)^n - 1) / r
Suppose an employee earns $80,000 and the employer contributes 10% of pay, so the annual contribution is 80,000 x 0.10 = $8,000. Assume the fund earns 5% a year and contributions are paid at the end of each year for 3 years. The growth factor is (1.05^3 - 1) / 0.05 = (1.157625 - 1) / 0.05 = 3.1525. The balance after 3 years is 8,000 x 3.1525 = $25,220, of which $24,000 is contributions and $1,220 is investment growth.Case study
Seen in the real world.
Banksia Print and Pack is an illustrative, fictional manufacturer with 60 employees. After a payroll upgrade, the company found that the system was calculating contributions on base pay only, and leaving out overtime that should have been included.
The finance manager calculated that around $48,000 in contributions had been under-paid over two years. She reported the error, paid the shortfall with the interest and penalties required, and wrote to the affected staff.
In this illustrative case, the company then reviewed its payroll rules every quarter and added a reconciliation between payroll and fund payments. The extra cost of the review was small compared with the penalties and the damage to employee trust that the mistake had caused.
Watch out
Common mistakes.
- Calculating contributions on base pay only, when the rules may require overtime and some bonuses to be included.
- Paying contributions late, which can create penalties and extra charges that exceed the amount of the original contribution.
- Choosing a fund on past performance alone, when fees, risk and insurance features also have a large effect on the final balance.
Questions
People also ask.
Is superannuation the same as a pension?
It is a retirement savings account built over time, and it can be turned into a pension income stream in retirement, but the two are not identical.
Can I withdraw my super at any time?
Generally not, because access is restricted until you reach the required age and meet conditions, apart from limited special cases.
Who pays into my super?
Your employer must usually pay in a percentage of your pay, and you can add extra amounts yourself, subject to limits set by the tax authority.
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