Superannuation

Superannuation is a pension program created by the company itself for the benefit of its employees. Superannuation is therefore also termed as a company pension plan. Money deposited in a superannuation account tends to grow without any tax implications, until retirement or withdrawal.

Superannuation is funds that are added to the superannuation fund through the employer and employee contribution. This form of the monetary fund will be used to payout 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. Only at that point, an employee will be able to draw benefits from the fund. A retiree with superannuation will never be concerned about outliving their retirement funds. A superannuation fund differs from the other investment mechanisms as the benefits available to an eligible employee are defined by a set schedule and not by the performance of the investment.

During retirement, an employee can withdraw 25% of this superannuation fund amount and this amount is exempted from tax. The remaining 75% is invested in an annuity fund in the employee’s name, to ensure regular returns during the retirement period. Employees’ can further decide if they want to receive the annuity returns monthly, quarterly, half-yearly or annually. This amount will be considered as an income and hence is taxable.

Superannuation from the employer and employee perspective

Superannuation is a fixed, predetermined benefit plan depending on a variety of factors, but it does not depend on market performance. The factors that certainly are included are 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. If we look at this more from a business perspective, they may seem a little complex to administer but they also allow for larger contributions than other plans.

The employee will start to receive a fixed amount of money monthly post-retirement. The amount will be determined by a preexisting formula. The function of superannuation is as same as a Social Security benefit plan when it reaches the qualifying age or under eligible circumstances. 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.

The key difference between a Superannuation and other plans

Having superannuation guarantees a specific benefit once the employee qualifies for the same but that isn’t the same with other retirement plans. For example, superannuation cannot be affected by individual investment choices whereas retirement plans such as the 401(k) or IRA will be affected by positive and negative market fluctuations. Therefore, the exact benefit from superannuation can be calculated and predicted.

In the case of superannuation, an employee’s performance won’t lead to the risk of running out of funds before death as the performance does not affect it. Superannuation is not that risky and keeps your funds stable after retirement.

Benefits under superannuation are not impacted by market fluctuations but even though those funds are managed by a trustee that will invest those assets in a mix of equities and fixed securities. In that case, there is some risk that a market downturn could impact the solvency of the fund. In such cases, the plan could become underfunded, meaning there are not sufficient funds to meet future obligations.

Companies are required to submit a file report on the funding status of the plan o the IRS annually and to make that information available to their employees. In case, if a company’s plan is underfunded, then the company may be required to provide additional funding to remedy this situation.