A recent ABC News article revealed that Australia will shortly have the second-largest pool of retirement savings in the world.
With close to AUD $4.2 trillion of pension funds under management, “super” has become one of the saving and investment success stories of the past 30 years.
That success can be primarily attributed to the compulsory nature of the superannuation scheme, that provides retirement income for millions of Australians.
It has also created a win-win scenario for both the Australian government and individuals. This is because:
- The growth in retirement savings reduces the cost to the government of the Age Pension
- All working Australians are building a retirement fund and enjoying the potential of long-term investment growth.
It also helps instil an investment habit, and helps you enjoy a comfortable retirement.
Australia currently spends around 2.3% of GDP on the Age Pension. For comparison, the Office for Budget Responsibility has confirmed that the equivalent figure in the UK was 5.1% in 2023/24.
According to ABC News, the tax concessions on superannuation contributions cost the government $29.2 billion in 2024. While clearly a substantial amount, this is still relatively low compared to other countries in the Organisation for Economic Co-operation and Development (OECD).
Your employer will automatically deduct super contributions from your salary
If you are employed, super contributions are paid by your employer through deduction from your pre-tax income. These are known as your “Superannuation Guarantee”.
Your employer must contribute a minimum of 11.5% (rising to 12% in July 2025) into your super account. This compares very favourably with the current UK system in which employers and employees are legally required to contribute to workplace pension schemes, aiming for a total contribution of 8% of an employee’s qualifying earnings. The employer must contribute at least 3%, and the employee must cover the remaining 5%.
You are then able to make your own personal contributions on top of your Super Guarantee contributions. You can make concessional contributions from your pre-tax income of up to the current annual cap of $30,000, with tax at a concessional rate of 15% inside super, in comparison to your marginal tax rate (up to 47%) outside of super.
You can also “carry forward” your unused concessional contributions from the five previous tax years. This can be a useful way to give your fund a boost with a tax-efficient lump sum contribution.
You can also make non-concessional contributions from your post-tax income or savings of up to $120,000 each year (or up to $360,000 over a three tax year period, using the “bring forward” provisions).
Eligibility to make these contributions above the standard annual caps is dependent on the total value of your super fund, with each contribution type having a different threshold.
You can choose how your super contributions are invested
How you invest your super fund will clearly have a big impact on your future wealth and lifestyle in retirement.
Most super funds will provide default investment options (often “MySuper” or life stage options) as well as a range of other funds to select from.
When deciding how to invest, it’s important you take various factors into account. These will include:
- Your attitude to investment risk
- Your investment time frame and how long it is until you will retire
- How you diversify your investments across different market sectors.
You may also want to consider managing your super funds in a more hands-on way, using a Self-Managed Superannuation Fund (SMSF). This will provide you with ultimate flexibility and control when it comes to investing your funds.
However, you should be aware that managing your own fund will necessitate much more detailed reporting requirements, and we would strongly recommend that you get expert advice before doing this.
Find out more: The pros and cons of managing your own SMSF
You will need to ensure you have an income strategy in place when you retire
While your super contributions and investment growth have been taxed along the way (albeit at a concessional rate), you will not be liable for Income Tax on your fund once you start to draw from it after you reach age 60.
If you are between 60 and 65 and still working, you can draw up to 10% of your super fund as income through a “Transition to Retirement” arrangement. This can enable you to reduce your working hours while maintaining the same level of income, or use these funds to improve your personal tax position.
You will have total access to your entire tax-free super fund once you reach age 65, or when you cease employment permanently after age 60 if you are a permanent Australian resident or citizen. Ceasing gainful employment in these circumstances means working less than 10 hours each week and having no intention of returning to work for more than 10 hours each week.
The challenge then becomes how to translate that sum into providing you with an income for the rest of your life. It will be important to have an effective income strategy in place for when you finally retire. This strategy will need to:
- Make sure you don’t run out of money
- Ensure your income isn’t devalued by inflation
- Maintain an effective investment strategy.
Many super funds provide a drawdown-style facility enabling you to take a regular income from your fund. You can also purchase an annuity from a specialist provider using your super fund.
All this highlights the importance of planning ahead and ensuring that you take effective steps to secure your income with a robust strategy for your retirement.
Find out more: How much income will you need in retirement?
Get in touch
If you have any queries regarding your retirement planning generally and your super arrangements in particular, please get in touch with us.
Please note
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
This article is for information only, it does not take into account your personal objectives, financial situation, or needs.
Please do not solely rely on anything you have read in this article and ensure that you conduct your own research to ensure any actions you may take are suitable for your circumstances. All contents are based on our understanding of ATO legislation, which is subject to change.