What is Superannuation?

Superannuation may be described as a long term savings plan for people to accumulate wealth during their working life to provide  them with an income when they retire.

Superannuation (or super for short) is money set aside during your working life, to provide you with money to live on during your retirement. You generally begin accumulating super when you start work as your employer will start making contributions to a fund on your behalf.

A superannuation fund is just a structure in which investments are held.

All super funds are a type of trust with special rules to ensure that they primarily provide retirement benefits (either pensions or lump sums). The reasons for keeping investments in a superannuation fund are because it provides:

  • a tax-advantaged environment
  • an effective estate planning vehicle.

The main disadvantages are:

  • it is generally not possible to access your money until you retire from work, or after 55 years of age with a transitional pension
  • there are special rules about how the fund must be run.

This means that superannuation may not always be the best way to hold your investments.

Other structures such as companies and discretionary trusts also have rules which are different to holding investments in your own name.

You should read the investment structures page carefully before deciding that superannuation is the most appropriate investment structure for you.

Case Study

John and Wendy are both 45. They own their own house and have two children. They recently paid off their mortgage and would like to use this money to set up a savings plan.

John’s friend Jack has suggested that they should put the money into superannuation because of the tax advantages. John is not sure this is the best thing to do.

John is right - they have a number of options and the most appropriate answer really depends on their goals and cash flow needs.

For example, if their children are still at school they may need to keep some money outside the super system so they can easily access it (e.g. a family trust may be suitable), whereas if their children are no longer financial dependants they might consider not only superannuation, but also gearing into property or shares.

Overall, they need to remember that any money placed into superannuation is not accessible until they are at least 60.

So, whilst super may be appropriate, there are more issues to consider than just the tax advantages.