What is a 'Superannuation'

A superannuation is an organizational pension program created by a company for the benefit of its employees. It is also referred to as a company pension plan.

Funds deposited in a superannuation account will grow typically without any tax implications until retirement or withdrawal. These plans are usually either defined-benefit or defined-contribution plans.

BREAKING DOWN 'Superannuation'

As funds are added, by employer (and potentially employee) contribution and other traditional growth vehicles, the funds are reserved in a superannuation fund. This form of monetary fund will be used to pay out employee pension benefits as participating employees become eligible. An employee is deemed to be superannuated upon reaching the proper age or as a result of an infirmity. At that point, the employee will be able to draw benefits from the fund.

A superannuation fund differs from some other retirement investment mechanisms in that the benefit available to an eligible employee is defined by a set schedule and not by the performance of the investment.

Understanding Defined-Benefit Plans

As a defined-benefit plan, a superannuation supplies a fixed, predetermined benefit depending on a variety of factors, but it is not dependent on market performance. Certain factors may include the number of years the person was employed with the company, the salary received by the employee, and the exact age at which the employee begin to draw the benefit. Employees often value these benefits for their predictability. From a business perspective, they can be more complex to administer, but they also allow for larger contributions than some other employer-sponsored plans.

Upon qualifying for retirement, the eligible employee receives a fixed amount, usually on a monthly basis. The amount is determined by a preexisting formula. The function of a superannuation, in that regard, is similar to receiving Social Security benefits upon reaching the qualifying age or under qualifying circumstances.

Key Difference From Other Investment-Based Retirement Plans

While a superannuation guarantees a specific benefit once the employee qualifies, other traditional retirement vehicles may not. While a superannuation is not affected by individual investment choices, retirement plans such as the 401(k) or IRA may be affected by positive and negative market fluctuations. In that sense, the exact benefit from an investment-based retirement plan may not be as predictable as those offered in a superannuation.

A person on a defined-benefit plan should not have to be concerned with the total amount remaining in the account, and is at a low risk of running out of funds prior to death. In other investment vehicles, poor performance could lead a person to run out of available funds prior to death.

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