Superannuation: What It Is, How It Works, Types of Plans

What Is Superannuation?

A superannuation is an Australian pension program created by a company to benefit its employees. Funds deposited in a superannuation account will grow through appreciation and contributions until retirement or withdrawal.

The term "super" is more commonly used when referring to pension plans available in Australia. The U.S. equivalents to a superannuation plan are defined-benefit or defined-contribution plans.

Key Takeaways

  • Australian superannuation funds are more commonly referred to as super funds.
  • There are two types of superannuation funds; defined-benefit funds and accumulation funds.
  • Accumulation fund distributions and total value are subject to market fluctuations.
  • Defined-benefit plans are not subject to market fluctuations but can be mismanaged and run out of funding.
  • Both types of super funds have specific taxable conditions depending on the contribution and contributor's circumstances.

Understanding Superannuation

As funds are added by employer (and potentially employee) contributions and other traditional growth vehicles, the funds are reserved in a superannuation fund. This monetary fund pays 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 infirmity. At that point, the employee can 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.

Types of Superannuation Plans

There are two types of superannuation funds, called super funds in Australia.

Accumulation Funds

An accumulation fund is basically what the name says it is. Employees and employers periodically contribute to the fund so that it grows over time. The funds are designed to increase by using the contributions in investment strategies to give a return on investment, allowing for larger distributions.

Accumulation funds are distributed to retirees based on the returns generated, so the more you put into the fund and the more it grows, the more you can receive in retirement.

Superannuations are taxed differently in the U.S. and Australia. It can become complicated if you have an Australian super and are subject to U.S. tax laws. It's best to consult with a tax expert to find out your tax obligations.

Defined Benefit Fund

Defined benefit plans are funds that make distributions based on a formula to give a guaranteed amount of income when withdrawals begin. These are similar to annuities or pension plans where employment length and salary history are considered.

Benefits of Superannuation

A superannuation has many benefits. Some of the most notable are:

  • Lower fee structures: Fees tend to run low compared to other retirement account options
  • Simple features: Most supers only provide what you need and give you choices for any extra services.
  • Investment choices: Supers generally allow you to choose your investment types. Depending on your preferences, you can choose from retail, industry, public, corporate, or self-managed super funds.
  • They can follow you throughout your career: A super fund can be "stapled" to you instead of the employer so that it follows you throughout your career. These are called stapled super funds.
  • You can access them early: If you become incapacitated permanently, temporarily unable to work, or have a terminal medical condition, you can access your super early without penalty.
  • Guaranteed income throughout retirement: Super funds guarantee you won't run out of retirement funds before death.
  • Government contributions of up to $500: If you meet specific criteria, the government will contribute a maximum of $500 to your super fund.

Superannuation From the Employer and Employee Perspective


A defined benefit superannuation supplies a fixed, predetermined benefit depending on various factors, but it is not dependent on market performance. Specific factors include the number of years the person was employed with the company, the employee's salary, and the exact age at which the employee begins to draw the benefit.

Employers 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 U.S. employer-sponsored plans. Accumulation funds are not as predictable, but still rely on the same factors as defined benefit plans.

Employers who contribute to a super account pay a set tax rate of 15% on the contributions. If you're self-employed, you can deduct your contributions from your taxes, but your super fund pays a 15% tax on them.


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

Accumulation funds can increase payouts, but they can also decrease them if the market doesn't cooperate. Employees should be cautious when choosing this type.

Depending on what other retirement savings vehicles the employee has, there may be other implications that require consideration to access the funds in the most tax-efficient way possible.

Non-concessional contributions are from your after-tax income and are not taxed in a super fund. Concessional contributions are from pre-tax income and are taxed at 15% when placed in your super.

Contributions made to a super from after-tax income are not taxable. However, capital gains made in the fund are taxable under specific circumstances. Everyone has a super capital gains tax cap which they can claim under their non-concessional gains.

Superannuation vs. Other Plans

While a superannuation guarantees a specific benefit once the employee qualifies, other traditional retirement vehicles may not. For example, a defined benefit superannuation is not affected by individual investment choices, but U.S. retirement plans such as the 401(k) or IRA can 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.

Market fluctuations do not impact the benefits of defined benefit funds, but the funds in the plan are typically managed by a trustee who invests those assets in a mix of equities and fixed securities. In that sense, there is some risk that a market downturn could impact the fund's solvency. In such cases, the plan could become underfunded, meaning there are not sufficient funds to meet future obligations.

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

Companies are required to report the funding status of the plan to the appropriate tax authority annually and to make that information available to employees. In the event a plan is underfunded, a company may be required to provide additional funding to remedy the situation.

What Do You Mean by Superannuation?

Superannuation is an Australian retirement account with two types: one that can appreciate over time and has variable payouts depending on market conditions, and one that has a defined benefit payout system that is not susceptible to market fluctuations.

What Is the Difference Between Superannuation and Retirement?

Superannuation is a retirement account that Australians can use to fund their retirement. Retirement means building enough wealth not to need to work again.

What Is Superannuation in Salary?

Superannuation is a retirement fund offered by an employer. You and your employer contribute to this fund to help you build enough wealth to fund your retirement.

The Bottom Line

A superannuation is an employer-sponsored retirement account used in Australia. It is similar to U.S. annuities or defined benefit plans in which the retiree receives a set amount based on a formula that accounts for time employed, average salary, and amount contributed.

A superannuation can also be an accumulated fund, where the benefit you receive depends on the amount you and your employer contribute and market conditions.

Article Sources
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  1. Australian Taxation Office. "Super."

  2. Australian Securities and Investments Commission. "Accumulation Fund."

  3. Australian Securities and Investment Commission. "Defined Benefit Fund."

  4. Australian Securites and Investments Commission. "Types of Super Funds."

  5. Australian Tax Office. "Super Co-Contribution."

  6. Australian Securities and Investments Commission. "Tax and Super."

  7. Australian Tax Office. "Non-Concessional Contributions and Contribution Caps."

  8. Australian Tax Office. "Concessional Contributions and Contribution Caps."

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