Superannuation, or “super,” is a vital retirement savings scheme in Australia, ensuring financial security in later years. Calculating superannuation involves multiplying your gross salary by the Superannuation Guarantee rate, currently set at 11.5%. This guide breaks down how to calculate superannuation, understand contributions, and optimise your retirement savings.
What is superannuation?
Superannuation (or ‘super’) is money reserved for your use during old age and takes care of all finances you may need; thus enabling you to enjoy a comfortable lifestyle even at an advanced age. In order for this to happen then there must be various investments made which will enhance its value over time allowing one to retire in style.
Importance of superannuation
Super is a retirement savings scheme. A part of your paycheck is allocated to a superannuation fund, which utilises the funds for investments until your retirement. Many kinds of super funds exist, with different accounts.
Employer contributions: How much should you receive?
The first step in calculating your superannuation is understanding how much your employer is contributing to your super fund.
- Superannuation guarantee (SG): The concern with the above is that, according to the current law, an employer must deposit 11% of one’s ordinary earnings (OTE) into superannuation. This is referred to as the Superannuation Guarantee (SG).
- Ordinary time earnings (OTE): OTE typically consists of rates of pay or base salary, bonuses, allowances and other payments you earn within your normal working hours.
Example calculation:
If you earn $70,000 per year in ordinary time earnings:
- SG contribution = 11% of $70,000
- SG contribution = $7,700 per year
This is the yearly contribution your employer will make to your superannuation fund.
Additional contributions: Boosting your super
Beyond the compulsory employer contributions, you can also make additional contributions to boost your superannuation savings. These are follow in two main ways:
Salary sacrifice (Before-Tax Contributions)
Explanation: Agreeing with the employer to pay part of the before tax salary directly into the super fund can also reduce the taxable income while increasing the super savings.
Limitations: The employer SG contributions and salary sacrifice contributions must not be more than total concessional contribution cap which is $27,500 per year as from 2024.
After-Tax Contributions
Explanation: These are contributions made from your take-home pay after taxes have been deducted. You’re welcome to make a single contribution whenever you choose.
Government Co-Contribution: If your income falls below a certain limit you might qualify for government co-contribution to your super on making after-tax contributions.
Example calculation:
If you decide to salary sacrifice $5,000 per year on a $70,000 salary:
- Employer SG contribution = $7,700 per year
- Salary sacrifice contribution = $5,000 per year
- Total annual contributions = $12,700
This total is well within the concessional cap, meaning you’re optimising your super without incurring additional taxes.
Calculating your total superannuation balance
Your total superannuation balance is the sum of all contributions made to your super fund(s) over time, plus any investment returns, minus any fees and taxes. Here’s how to calculate it:
Sum of contributions: Commence with summing up all contributions received from your employer, any salary sacrifice contributions, and any after-tax contributions you have made over the years.
Investment returns: Superannuation funds utilise your money in several assets and thus generating shares, property as well as bonds. Your super is growing due to profits produced from these investments. You can check the collective amount invested for your annual super statement or through your super fund’s internet portal.
Fees and taxes: The total should be adjusted by deducting the administration and investment fees incurred by the fund as well as taxation.
Example calculation:
Assume over 10 years, you and your employer have contributed a total of $100,000, and your investment returns have added $20,000. If fees and taxes amount to $5,000:
- Total contributions = $100,000
- Investment returns = $20,000
- Fees and taxes = $5,000
Total superannuation balance = $100,000 + $20,000 – $5,000 = $115,000
Is superannuation paid on holiday leave loading?
Leave loading is not factored into calculations where it is used to compensate for the opportunity cost of working additional hours. However, if it is unrelated to overtime, then this charge is subject to superannuation contributions. It helps to have an employment agreement that is straightforward and easy to read.
Advantage or Disadvantage of superannuation
- Benefit: Australian super offers members default insurance coverage as part of their superannuation account. Based on the members’ age, benefits like death tax, total and permanent disability (TPD), or income protection may be included.
- Disadvantage: Most of your savings will be locked for a predefined period. While family and lifestyle needs may change, a superannuation fund cannot easily adjust to these changes.
Conclusion
Your retirement savings management requires calculating your superannuation. By knowing how much you contributed to it, how well your investments are rated, and what your balance could be like in future, you can manage it yourself. Keep in mind that the earlier you start to take note of your superannuation scheme, the better you will be placed for a happy and safe retirement.
