Introduction to Superannuation Systems and Structures – Part 1

Superannuation is the cornerstone of retirement planning in Australia, forming a critical foundation for financial security in later life. It is a compulsory long-term savings system designed to ensure that individuals accumulate funds throughout their working lives to support themselves in retirement. Employers are required to contribute a portion of employees’ earnings into superannuation funds (the Superannuation Guarantee), and individuals can add further contributions. Over the decades, this system has grown Australia’s pool of retirement assets to well over $4 trillion, making it one of the largest pension systems globally. Superannuation works alongside the government age pension (a means-tested safety net) and other personal investments as part of a three-pillar retirement income framework.

For financial advisers, a thorough understanding of superannuation systems and structures is essential. This module introduces the key elements of the superannuation system – how money goes in, how it’s preserved and grows, and how it comes out in retirement – as well as the regulatory environment that governs it. We will examine contribution types and limits, preservation rules for accessing benefits, the taxation concessions that make super an attractive wealth-creation vehicle, and the retirement income stream options available to retirees. We also outline the different types of superannuation funds (industry, retail, self-managed, etc.) and discuss their advantages and disadvantages for various client scenarios. Additionally, the module touches on the regulatory framework, trustee obligations, and industry oversight mechanisms that safeguard members’ interests. With this foundation, advisers can confidently educate clients on superannuation’s role in long-term wealth creation and retirement security, and ensure their advice meets the high standards required in Australia’s financial planning profession.

Overview of the Australian Superannuation System

Australia’s retirement income system is frequently cited as a global model, built on three pillars: (1) a means-tested government Age Pension as a safety net, (2) compulsory private savings through superannuation, and (3) voluntary savings (including additional super contributions and other investments). Superannuation was made compulsory in 1992 with the introduction of the Superannuation Guarantee, which requires employers to contribute a percentage of employees’ earnings into a super fund. As of 2025, the Superannuation Guarantee (SG) rate has reached 12% of ordinary earnings. This compulsory policy has greatly increased coverage – virtually all Australian employees now have super – and driven the growth of the superannuation industry’s asset pool to over $4 trillion. One of the core objectives of the super system is to encourage self-funded retirement and reduce reliance on the public Age Pension. By mandating contributions and offering tax incentives (discussed later in this module), the system effectively forces individuals to save for retirement. Superannuation savings are generally “preserved” until retirement, meaning they cannot be accessed freely until certain conditions are met (such as reaching retirement age), ensuring that the funds serve their intended purpose.

From an operational standpoint, during a person’s working life their superannuation is in the accumulation phase: contributions are made (by employers and often by individuals as well), and the money is invested in various assets (shares, bonds, property, etc.) to generate returns. Upon retirement or meeting other release conditions, the accumulated balance can be converted into the retirement phase – for example, by starting an income stream (pension) from the fund or taking a lump sum. In retirement phase, earnings on super investments can become tax-free (up to a limit), which enhances the benefit to retirees. Australians have flexibility in how they use their super at retirement: many convert their super into an account-based pension to draw a regular income, some withdraw part as a lump sum (e.g. to pay off a mortgage or other debts), and some may purchase annuities for guaranteed income. Overall, superannuation has become a primary source of retirement income for most Australians, complementing or substantially reducing reliance on the Age Pension.

Contribution Types and Limits

Contributions are the lifeblood of superannuation accounts. There are two main categories of contributions to super: concessional (before-tax) contributions and non-concessional (after-tax) contributions. Each type has its own rules and annual limits (caps), and each receives different tax treatment:

• Concessional contributions are made from income that has not yet been taxed by the time it goes into super. This category includes employer SG contributions, salary sacrifice contributions (where part of your salary is redirected into super before income tax), and personal contributions for which you claim a tax deduction. All concessional contributions are taxed at a flat rate of 15% when received by the super fund. For most individuals, this 15% tax is significantly lower than their marginal income tax rate would be if they took that money as salary, which makes contributing to super very tax-effective. There is a cap on how much can go in as concessional contributions each financial year – currently $30,000 per person (for 2024–25). This cap encompasses all concessional contributions, whether from your employer or your own salary sacrifice/personal deductible amounts. If you contribute above this cap, the excess amount is generally taxed at your normal marginal tax rate (eliminating any tax benefit of the extra contribution). High-income earners (those with incomes above $250,000 per year) should note that an additional 15% tax applies to their concessional contributions above that threshold, effectively making their contributions taxed at 30% – this reduces (but does not eliminate) the tax advantage for very high incomes. Some flexibility exists via a carry-forward rule: if your concessional contributions were under the cap in previous years and your total super balance is under $500,000, you can carry forward unused cap amounts for up to five years to “catch up” with a larger contribution in a later year.
• Non-concessional contributions are made from after-tax money (income on which you have already paid income tax, or money that was tax-free to begin with). Common examples are personal contributions you make from your take-home pay or savings for which you do not claim a deduction, and contributions made by your spouse into your super. These contributions are not taxed when they enter the fund (since they come from post-tax money), but they are still valuable because future earnings on those contributions inside super will be taxed at the concessional super rate (15%, or 0% in retirement phase) and withdrawals can be tax-free in retirement. The government limits how much after-tax money you can put into super each year: the annual non-concessional contributions cap is $120,000 per person (2024–25). Moreover, if you are under age 75, you have the option to bring forward up to two additional years’ worth of non-concessional cap – potentially contributing up to $360,000 in one go (and then making no further non-concessional contributions for the subsequent two years). This bring-forward rule is often used when someone receives a large sum (like an inheritance or sale of a property) and wants to invest a lot into super at once. There is an important restriction: if your total superannuation balance is very high (above a legislated threshold, currently $1.9 million), you are not allowed to make new non-concessional contributions. This prevents very wealthy individuals from sheltering unlimited amounts in the tax-advantaged super environment. Note that certain special contributions – for example, downsizer contributions (a one-time contribution of up to $300k from the proceeds of selling your primary home, available from age 55) – are not counted against the non-concessional cap.

Aside from these primary contribution types, there are a few incentives and strategies to be aware of:

• Government co-contribution: Low and middle-income earners who make after-tax contributions to their super may be eligible for a government co-contribution. For instance, if your income is below a certain threshold and you put $1,000 of your own after-tax money into super, the government might contribute up to $500 into your super account as a bonus. This incentive phases out as income rises, but it’s essentially free money for those who qualify.
• Spouse contributions and offset: If your spouse has a low income or is not working, you can contribute to their super fund. If you contribute up to $3,000 on behalf of a low-income spouse, you can receive a tax offset (rebate) of up to $540 on your income tax. This strategy can boost the retirement savings of a partner who might have taken time out of the workforce (for example, for caregiving responsibilities) and reward the contributing spouse with a tax break.
• Contribution splitting: Members are allowed to split up to 85% of their concessional contributions for a year with their spouse. After the end of the financial year, you can request your super fund to transfer part of your contributions into your spouse’s super account. This is useful to even out super balances between spouses – for example, to help a spouse with a lower balance catch up, or to position savings with an older spouse who will reach retirement age sooner.
• Salary sacrifice strategy: Many people arrange with their employer to salary sacrifice a portion of their pre-tax salary into super (in addition to the compulsory SG). This can be a very tax-efficient way to boost super, because you are essentially taking income that would have been taxed at (say) 34.5% or 39% and having it taxed at 15% in super instead. Over years, the extra contributions compound, significantly increasing retirement savings. An adviser will usually ensure the total employer + sacrificed amount stays within the concessional cap, and also consider the client’s cash flow needs (so they don’t sacrifice so much that they struggle with expenses). Salary sacrifice is especially powerful for mid-career clients who can afford to put a bit more away for the long term and want to reduce current tax.

Preservation Rules and Access to Benefits

One defining feature of superannuation is that it’s preserved for retirement – you generally cannot withdraw your super until you meet certain conditions. These preservation rules exist to prevent people from using up their retirement savings early. The money in super is classified as preserved benefits (untouchable until a condition of release) unless an exception applies.

Preservation age and retirement: Each individual has a preservation age, between 55 and 60 depending on their date of birth. For example, preservation age was 55 for those born before 1960, and it increases gradually to 60 for those born from July 1964 onward. Preservation age is the minimum age at which you can access your super if you have also retired. “Retired” in superannuation terms has a specific meaning: if you are under 60, it means you have permanently ceased gainful employment and do not intend to work again (more than 10 hours per week) before age 60. Once you reach age 60, the retirement condition is a bit easier – simply ending an employment arrangement after turning 60 is sufficient to be considered retired for whatever super you accumulated up to that point. In practical terms, many Australians choose to retire around or after their preservation age and access their super at that time. By age 65, all superannuation can be accessed regardless of work status – 65 is an automatic condition of release, even if you are still working. (Notably, there is no law forcing you to withdraw your super at 65 or any age – you can keep it invested in super as long as you like. Only upon death would it have to be paid out to your beneficiaries or estate.)

Transition to retirement (TTR): Suppose you have reached your preservation age but aren’t ready to retire fully – you might be continuing to work part-time or transitioning into retirement. The rules allow you to access a portion of your super via a Transition to Retirement Income Stream (TTR). A TTR is essentially an account-based pension you can start while still working, with some restrictions: you can only withdraw up to 10% of the account balance per year, and you cannot make lump sum withdrawals (commutations) from it until you meet a full condition of release (like retirement or 65). The idea is to supplement your income as you reduce work hours, or to enable strategies like simultaneously salary sacrificing more into super while drawing a TTR pension to replace that income (which can have tax benefits). It’s important to note that earnings on super assets supporting a TTR pension are not tax-free (they continue to be taxed at 15% until you fully retire), unlike a normal account-based pension after retirement. Once you do retire or hit age 65, the TTR account can be converted to a regular pension account and the earnings become tax-free at that point.

Limited early access (special conditions): Super is meant for retirement, but there are a few exceptional circumstances where the law allows people to access some of their super early:

• Severe financial hardship: If you’re experiencing severe financial hardship (for example, you’ve been on certain government income support payments for a sustained period and cannot pay for living costs), you can apply to your super fund to release a small amount of your super (usually capped, e.g. a maximum of $10,000) to help relieve the hardship. Strict criteria and evidence are required, and generally only one withdrawal is permitted in any 12-month period under this condition.
• Compassionate grounds: The Australian Taxation Office (ATO) can approve early release of super on specific compassionate grounds. These include: to pay for urgent medical treatment or medical transport for you or a dependant, to prevent foreclosure on your mortgage or power of sale of your home, to pay for modifications to your home or vehicle to accommodate a severe disability, or to pay for a dependent’s palliative care or funeral expenses. Only the amount reasonably necessary is released (for example, if you have a $7,000 unpaid expense, they may approve that amount). The funds are generally paid directly to the service provider (e.g., hospital, bank, etc.).
• Permanent incapacity: If you become totally and permanently disabled (physically or mentally) such that you are unlikely to ever work again in a job you are qualified for, you can access your super early as a disability benefit. The trustee of your fund will require medical certification of your condition. Super benefits taken due to permanent incapacity receive favorable tax treatment (they come with a disability super tax offset that can reduce any tax payable).
• Terminal medical condition: If medical specialists certify that you have an illness or injury likely to result in death within 24 months, you can access your super (and any insurance in super) immediately as a lump sum. These payments are completely tax-free (regardless of age). This rule is designed to allow those with a terminal diagnosis to use their super for needs or bucket-list wishes in the time they have left, without tax impediments.
• First Home Super Saver Scheme: This scheme, introduced in recent years, allows first-home buyers to withdraw voluntary contributions they made to super (up to certain limits) to use toward a deposit on their first home. The idea is to leverage the tax benefits of super to help young people save for a house deposit. Under the scheme, you can access up to $50,000 of eligible personal contributions (plus associated earnings) for a first home purchase. While not a “condition of release” in the usual retirement sense, it is an example of the system providing earlier access for a specific purpose.

Aside from these, there are a few other niche conditions (like a departing Australia payment for temporary residents leaving the country, or small balance cash-outs for tiny accounts), but in general, if none of the conditions of release are met, your super stays preserved. If someone tries to withdraw super without meeting a condition (or schemes to access it via an illegal arrangement), they can face severe penalties, including heavy tax on the withdrawn amount and fines.

When you do meet a genuine condition of release (e.g., you retire or turn 65), you typically have full access to your super. You can cash it out as a lump sum, start a retirement income stream, or do a combination of both. Many retirees choose to roll most of their super into an account-based pension (to draw a regular income) and perhaps take a portion as lump sum for immediate needs or to pay off debt. An adviser’s role is often to help determine the best way to use the super – balancing the security of having some cash on hand with the benefit of keeping as much as possible invested to provide income through all of retirement.

Taxation Concessions in Superannuation

Superannuation is often described as a tax-advantaged environment. The government provides tax concessions at three stages: on contributions, on investment earnings, and on benefits (withdrawals). These tax benefits are a major incentive for people to use super for long-term saving.

Tax on contributions: Concessional contributions (employer SG, salary sacrifice, and deductible personal contributions) are taxed at 15% when they enter the fund. This is considerably lower than most people’s normal income tax rate. For example, if you earn $70,000 a year, your marginal tax rate is 34.5% (including Medicare levy). If you salary sacrifice $10,000 of that into super, that $10k is taxed $1,500 in the fund (15%) instead of the $3,450 you would have paid in income tax – meaning an extra ~$1,950 ends up invested in your super rather than going to the ATO. This is why concessional contributions are so appealing. If you are a very high earner and subject to Division 293 (the additional 15% on contributions beyond $250k income), your benefit is smaller but you’re still usually better off than if you took the money as salary. Non-concessional contributions, being from post-tax money, are not taxed upon contribution (since you already paid income tax on those funds). However, there are indirect tax considerations: putting after-tax money into super converts it into the super environment where earnings will be taxed at 15% instead of your potentially higher marginal rate outside, and eventual withdrawals can be tax-free. If you exceed your contribution caps, tax penalties apply. Excess concessional contributions can be taxed at your marginal rate (with an option to withdraw the excess), and excess non-concessional contributions may be taxed at the highest marginal rate unless you elect to withdraw the excess. These measures ensure people don’t unfairly get around the limits.

Tax on investment earnings: While your money is invested in super, the earnings it generates are taxed at a maximum of 15%. This includes interest, rent, dividends, etc. Capital gains on assets held longer than 12 months are effectively taxed at 10% (because super funds get a one-third discount on capital gains tax). These tax rates are much lower than the rates most individuals would pay on investment earnings outside super, making super a very tax-efficient place to invest. Moreover, once you convert your super into a retirement phase pension, the earnings on the assets supporting that pension become tax-free. There is a limit to how much can be transferred into this zero-tax retirement phase – the Transfer Balance Cap (currently $1.9 million per person) – but for amounts within that cap, all interest, dividends, and capital gains in pension phase are not taxed at all. This means that retirees with substantial super can potentially earn investment income without any tax, which significantly preserves and extends their capital. (Any super above the cap can stay in accumulation phase, taxed at 15%, or remain outside super.) Also note that super funds can benefit from franking credits on Australian share dividends; in accumulation, those credits reduce the 15% tax on earnings, and in pension phase, the fund can even receive franking credit refunds since the fund itself owes no tax.

Tax on benefits (withdrawals): Superannuation benefits are taxed based on your age and the nature of the benefit. The great news is that for individuals aged 60 or over, withdrawals from a taxed super fund are entirely tax-free. This has been the case since 2007 and makes managing retirement income simpler – you do not pay any tax on pension payments or lump sums taken after 60 (aside from some very specific cases like certain public sector funds which might have an untaxed element). If you take a super benefit between preservation age and 59 (for example, you retire at 58 and withdraw some super), the benefit may be taxable but at concessional rates. There is a tax-free component (which corresponds to any non-concessional contributions you made – those come out tax-free) and a taxable component. Lump sums taken in this age bracket are tax-free up to a “low rate threshold” (around $235,000 as a lifetime cap) – above that, the taxable part is taxed at 15% plus Medicare levy. If you receive a pension (income stream) while under 60, those payments are added to your income but you are entitled to a 15% tax offset on the taxable portion, which substantially reduces the tax. By the time you reach 60, any ongoing pension becomes tax-free. For those who somehow access super before preservation age (only allowable under the special conditions like terminal illness or permanent incapacity), different tax rules apply: for example, a lump sum to someone under preservation age (outside of death/disablement cases) would be taxed at 20% plus Medicare on the taxable portion. The important principle is that the tax regime heavily favors using super for retirement. Once you are actually retired and of age, the system is very generous (tax-free after 60). If you try to take money earlier than allowed, not only are there legal barriers, but the tax will be high to remove the benefit of doing so.

In summary, the super system provides up-front tax concessions (15% contributions tax instead of higher income tax) and ongoing concessions (15% or 0% on earnings instead of up to 47% outside super) and then end concessions (0% tax on most withdrawals for retirees). These concessions are a trade-off: you get generous tax breaks, but your money is locked away until retirement. For most people, this trade-off is well worth it. Advisers will typically want to maximize a client’s use of these tax concessions – for example, by suggesting contributions up to caps, or by transitioning investments into super where appropriate – as part of an overall strategy to improve the client’s net retirement position.

Retirement Income Streams and Options

Upon retirement, the focus shifts from accumulating super to turning those savings into an income that can last for the rest of the client’s life. The main retirement income stream products in the superannuation system are account-based pensions (also called allocated pensions), annuities, and (for a minority with older funds) defined benefit pensions. Each has different features and suitability.

Account-Based Pensions

An account-based pension is the most common way Australians draw down their super. When you meet a condition of release (typically retirement or reaching age 65), you can move your super money into an account-based pension account. It remains invested (you usually can choose investment options similar to when in accumulation), but now you can start taking regular withdrawals to provide yourself with an income. Key points about account-based pensions:

• There is a minimum amount you must withdraw each year, set by law as a percentage of your account balance (the percentage increases as you get older – for example, 4% at ages 55–64, 5% at 65–74, 6% at 75–79, etc.). These minimum drawdowns ensure people use their super for retirement income and not indefinitely defer taking it out. There is no maximum – you can withdraw more than the minimum, even the whole balance if you wish (except if it’s a transition to retirement pension before retirement).
• You have flexibility in payment frequency (monthly, quarterly, annually, etc.) and amount (above the minimum). Many people set it up to pay like a salary replacement – e.g., a fortnightly or monthly pension payment into their bank account.
• Importantly, as mentioned earlier, investment earnings on the assets supporting an account-based pension are tax-free within the fund (up to the transfer balance cap limit). And for the individual, if they are 60 or older, the pension payments they receive are tax-free as well. This makes account-based pensions very tax-efficient.
• The pension will continue for as long as the account has money. Unlike a defined benefit, it doesn’t guarantee a lifetime income – if you live very long or your investments perform poorly relative to what you draw out, you could exhaust your account. Managing this longevity risk is a key issue; advisers often project how long a client’s account might last under different scenarios.
• Any money remaining in the account when you die can be left to your beneficiaries. You can generally nominate your spouse or other dependants to receive either a lump sum of the remaining balance or continue the pension (if rules allow a reversionary pension). This ability to leave an inheritance (if balances remain) is sometimes seen as an advantage over life annuities (which might cease on death unless specific guarantees were purchased).

Account-based pensions provide great flexibility and, combined with the tax benefits, usually form the core of most retirees’ income strategy. An adviser will help set a sustainable withdrawal rate and possibly adjust asset allocation to balance the need for income with the need for growth (to last potentially decades).

Annuities and Other Guaranteed Income Products

An annuity is a product typically offered by life insurance companies outside the super fund structure, but you can use your super money to purchase one at retirement. In exchange for a lump sum premium, an annuity will pay you a guaranteed income stream. There are various types:

• A lifetime annuity pays you an income for the rest of your life (and can be set up to also cover your spouse’s life). This can be indexed to inflation or set at a fixed nominal amount. The big advantage is certainty – you cannot outlive the payments; the insurer carries the longevity and investment risk. The disadvantages include less flexibility (once purchased, you usually can’t alter payments or access a lump sum of the capital) and potentially leaving little or nothing for heirs (depending on whether any death benefit feature or minimum payment period was built in).
• A fixed-term annuity pays a guaranteed income for a set number of years (e.g., 10 years). At the end, you might get a residual lump sum back (if structured that way). These are less commonly used in retirement planning now, but some people might use a term annuity to cover a specific gap (say, to provide income from retirement until Age Pension kicks in at age 67, for example).

When purchased with superannuation money after reaching a condition of release, annuity payments to those over 60 are tax-free (because they are considered super benefits). Annuities can provide peace of mind – for example, a lifetime annuity ensures that even if you live to 105, you will still be receiving income, which an account-based pension might not guarantee if it runs out.

However, annuities often come at the cost of lower initial income compared to an account-based pension (because of the guarantee and more conservative investment by the insurer). They also lack liquidity – you generally can’t decide to withdraw extra or stop and get your money back (except within a short cooling-off period or if specific flexible annuity products allow some access).

Advisers sometimes recommend a combination approach: use part of the super to buy an annuity (to cover essential living expenses with a guaranteed base income) and put the rest into an account-based pension (to maintain flexibility and growth potential). This way, a client gets the best of both – a safety net of lifetime income plus access to capital and potential for higher returns on the remaining funds. Modern product developments also include things like deferred annuities (longevity insurance that starts paying only if you live beyond a certain age) which are not yet widespread in Australia but are being considered under the Retirement Income Covenant initiatives.

Defined Benefit Pensions

Some Australians, particularly long-term government employees or those in older corporate schemes, may have defined benefit (DB) superannuation pensions. These are quite different from account-based pensions – the income is determined by a formula (usually based on salary and years of service) rather than depending on an account balance. Many of these schemes are closed to new members. If a client has a defined benefit pension, their retirement income from that portion is fixed (often indexed) and does not run out for their lifetime, which is a great benefit. However, DB pensions can have complex rules and different tax components (especially for certain older public sector schemes). Advisers should handle these cases with care, often recommending to retain a defined benefit if it’s generous.

For the scope of most new planning, defined benefit pensions aren’t something you can choose – you either have one from the past or not. But it’s worth noting as part of a client’s overall income mix. Many DB recipients also have accumulation super from other jobs or additional contributions, so they will often end up with a mix of DB income and account-based pension.

In July 2022, the Retirement Income Covenant came into effect, requiring super fund trustees to develop a strategy to assist their members in retirement – effectively nudging funds to consider offering more comprehensive retirement solutions (like combinations of products or guidance). We may see more innovative income stream options emerge, but the core choices described above remain central for now.

Types of Superannuation Funds

Throughout one’s accumulation and retirement journey, superannuation savings can be held in various fund structures. The main types of super funds in Australia include industry funds, retail funds, public sector funds, corporate funds, and self-managed super funds (SMSFs). Each type has unique features, ownership structures, and considerations, and each can be more or less appropriate depending on the client’s situation and preferences.

Industry Super Funds

Industry funds are large superannuation funds that were originally established (often by unions and employer groups jointly) to serve workers in particular industries. Today, many industry funds are public offer (open to anyone, not just those in that industry). They are run on a not-for-profit or “profit-to-members” basis. This means any surplus or profit is used to benefit members (such as by reducing fees or improving services), rather than distributed to shareholders.

Advantages: Industry funds typically have lower fees on average than retail funds, in part because they don’t pay dividends to shareholders. They often offer strong long-term investment performance, with many industry funds frequently ranked among the top performers. They also provide a fairly straightforward menu of investment options – usually a range of diversified options (Growth, Balanced, Conservative, etc.) and sometimes a few single-asset-class or ethical options. This simplicity can be good for members who aren’t investment experts. Additionally, industry funds usually come with default insurance (life, total & permanent disability, and income protection cover) for members on joining, which can be convenient and often cost-effective due to group rates.

Disadvantages: Industry funds generally do not provide the same breadth of investment choice that some retail funds or SMSFs do. You typically cannot directly invest in specific shares or exotic assets through an industry fund; you are limited to the options the fund offers. For most people this is not an issue, but for those who want very tailored portfolios, it’s a constraint. Also, because industry funds are run for members, they don’t come with a personal adviser by default (though many have financial advice services available). If a member wants intensive personal investment control or bespoke service, an industry fund might feel limited. Another consideration is that industry funds, like all super funds, have to meet regulator’s performance tests – some smaller or less competitive ones might merge or change if they don’t stack up, which can cause some changes for members (though generally beneficial ones like lower fees due to scale).

Industry funds are often an excellent choice for default super (for someone who doesn’t actively choose a fund, or who wants low fees and solid returns without needing to micromanage). Many advisers find that for clients with average balances who want a reliable fund, a top-performing industry fund is hard to beat.