Super Funds: How Do They Work?
Superannuation or super fund is one of the most important financial assets you can turn to during retirement. Although it is obligatory in Australia, many people are still in the dark of what super funds are and how they work.
There is no doubt that this fund has a huge role in our financial future. It is important to erase any confusion you feel about it, so here’s a guide that we prepared to help you out.
What is a super fund?
Super funds became compulsory in 1991. It is a form of forced retirement savings to ensure that Australians don’t rely solely on aged pension.
The idea is to set aside a small part of your salary from the day you start working. With this, you should have sufficient money to get by during retirement without needing assistance from the government. Not everyone retires with the same amount of super funds. Several factors determine the amount you get.
How do you make your super fund grow?
Employers are required by law to pay 9.5% of your annual salary every year. If you have an annual salary of AUD 1,000,000, your employer will contribute AUD 95,000 to your chosen super fund. The contribution will then be invested in various assets such as commodities, shares, cash, and property on your behalf.
The investment will grow over the course of your working life. You can withdraw the funds once you stop working.
Exceptions in super fund contribution
There are a few instances where the employer is not mandated to pay your super fund. This includes:
- Having a monthly salary of less than AUD 450
- You render less than 30 hours of work every week and you are under 18
- You are not an Australian resident and work outside Australia
Type of super funds to choose from
- Industry super funds
These are non-for-profit funds focused on a specific industry. These are open to all Australians. The profits return into the fund to benefit members.
- Retail super funds
These are for-profit funds owned by huge financial institutions such as banks or insurance providers. The profits are divided between financial advisers, shareholders, and members.
- Member-owned funds
These do not belong to the official Industry Super Funds group. Some are reserved for Australians residing in a specific state.
There are two ways to manage your super. This depends on how much you want to be hands-on in controlling your fund.
- Pre-made investment portfolio
Majority of Australians invest their super in this portfolio since it needs the least amount of work. The pre-made options are crafted according to risk-level such as “balanced”, “conservative”, “growth” and “high growth”.
Investment teams completely monitor the funds for you. They put the funds in various assets such as fixed interest, cash, property, local, and international shares. Most pre-made portfolios offer a default option. This spares you from the hassle of choosing the type of investment if you don’t want to.
- Build-your-own investment portfolio
This type of portfolio allows you to choose single asset classes to invest in. A pre-made portfolio normally invests in 6 to 7 asset classes. With a build-your-own investment portfolio, you can choose to focus on property and shares. You can even invest 100% of your funds to one asset class.
Compare super funds to maximise profit
A better fund enables you to live more comfortably once you retire. Doing research early on in your professional life will spare you thousands of dollars. Here are some tips on how to do so:
- Check the fees they charge.
- Check the fund performance – preferably a 3 to 5-year time frame instead of one.
- Make sure that you understand and agree with the company’s investment strategy.
- Consider ethical investing if it matters to you.
Ensure Higher Super Fund Returns By Comparing Your Options
Different super funds charge different fees. They also have different approaches when it comes to investing your money. Our team at Makes Cents has created a comparison table of super funds to help you get started. Check it out today!