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. In the United States, superannuation plans are usually either defined-benefit or defined-contribution plans.
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.
- A superannuation is more commonly referred to as a company pension plan.
- Superannuations are usually defined-benefit or defined-contribution plans.
- A retiree with a superannuation is typically less concerned about outliving their retirement funds.
Superannuation From the Employer and Employee Perspective
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 employee's salary, 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. As mentioned, 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. Depending on what other retirement savings vehicles the employee has, there may be other implications that require consideration in order to access the funds in the most tax-efficient way possible.
Key Difference Between a Superannuation and Other Investment-Based Retirement Plans
While a superannuation guarantees a specific benefit once the employee qualifies, other traditional retirement vehicles may not. For example, a superannuation is not affected by individual investment choices, but retirement plans such as the 401(k) or IRA will 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 generally will not have to be concerned with the total amount remaining in the account and is usually at a low risk of running out of funds before death. In other investment vehicles, poor performance could lead a person to run out of available funds before death.