Superannuation: Meaning, Benefits, and How It Works

Planning for retirement is one of the most important things that we all need to work on. Where some people start the process of wealth creation, others might follow the path of FIRE. But while you do so, you will come across various financial terms. Some of these might be quite simple, like a pension, but there are a few complicated ones, like superannuation.

So, now the question here is, what is superannuation? Superannuation means links to benefits. It is the benefits the employee gets from the employer long after they stop working for the company.

Now, this is not the same as the retirement benefits. So, if you are a salaried employee who is looking for financial planning, you must know the difference between superannuation and retirement well. Read this guide and explore all the key details you need here. 

What Is Superannuation?

Superannuation is a retirement benefit. It is designed to provide income after a person stops working. It is usually created by an employer. He is the one who makes regular contributions during the employee’s working years. These contributions build a retirement fund over time. Once the employee retires, the said amount is paid back to them. This can be in one lump sum payment or monthly installments. 

Key Features of Superannuation

• It is a long-term retirement-focused benefit.

• Contributions are generally made by the employer.

• The amount accumulates over the working life of an employee.

• Payout can be received as a lump sum or periodic income.

• It helps ensure financial stability after retirement.

Types of Annuities Available Under the Superannuation Scheme

There are various ways through which you can get the superannuation amount. The common ones are:

Pros and Cons of Superannuation

Superannuation has both advantages and limitations. This is one of the most important parts of successful retirement planning. While this is true, there are other reasons as well that make it important. But just like any other financial plan, there are limitations too. You must know both before you plan to invest or save for the same.

Pros of Superannuation

• It provides a steady source of income after retirement.

• It encourages disciplined long-term savings.

• Employer contributions reduce the burden of self-funding retirement.

• It offers financial security during non-earning years.

Cons of Superannuation

• Access to funds is usually restricted until retirement.

• The final amount depends on years of service and contributions.

• It may not be sufficient on its own for all retirement needs.

• Early exit can lead to lower benefits.

How Superannuation Works

Superannuation follows a clear and gradual process. It is the savings plan that starts during employment and supports an individual after retirement. Therefore, there are various stages that a person needs to go through before they start gaining the benefits. The details of the steps that you must know are:

Step 1: Employer Sets Up the Superannuation Plan

When an employee joins an organization, the employer enrolls them under a superannuation plan. This plan is part of the employee’s retirement benefits. This plan will stay in progress for the entire tenure of your work.

Step 2: Regular Contributions Are Made

The employer contributes a fixed amount regularly, usually every month, into the superannuation fund. In some cases, employees may also add voluntary contributions.

Step 3: Retirement Corpus Builds Over Time

As contributions continue year after year, the total amount grows into a retirement corpus. The longer the service period, the higher the accumulated value.

Step 4: Retirement or Exit From Service

You complete your tenure in the company. The time you retire is when this plan starts working for you. This is where you are now eligible to gain the benefits of the superannuation. This will be in the form that you select.

Step 5: Payout After Retirement

After retirement, the accumulated amount can be taken as a lump sum or converted into a regular income. The payouts will be credited to your account, from where you can use them. This way, the income that you have contributed will start coming back to you.

Example of How Superannuation Works

Anil has worked with a company for 28 years. His employer contributes Rs. 4,500 every month to his superannuation fund. Over time, this builds a retirement corpus. After retirement, Anil withdraws a part of the amount for immediate needs and uses the remaining balance to receive a steady income, ensuring financial stability in his post-working years.

Tax Benefits of Superannuation

Knowing the income tax benefits is important. Tax benefits are an important part of a superannuation scheme for both employers and employees. For employers, contributions to an approved superannuation fund are treated as deductible business expenses.

Contributions up to Rs. 1 lakh are tax exempt. So, if there is any amount that is beyond this limit are taxable. For employees, voluntary contributions qualify for deductions under Section 80C up to Rs. 1,50,000. 

Withdrawals at retirement, due to death, injury, or inability to work, and interest earned are generally tax-free.

Difference Between Retirement and Superannuation

The terms retirement and superannuation are often used together, but they do not mean the same thing. Retirement refers to the stage when a person stops working, while superannuation is a financial benefit that supports income after retirement. The table below explains the difference clearly.

Conclusion

Superannuation plays an important role in building financial security after retirement. It helps employees to get a fixed income even when they're no longer working. However, superannuation alone may not be enough for all retirement needs. 

Hence, you ned to have a proper plan of savings with you. Starting with a portfolio can help you greatly. This is where Rupeezy can help you. It allows you compare the options and invest better. 

FAQs

Is superannuation compulsory for all employees?
No. Superannuation is not compulsory. This is based on the choice of the employee.

Can employees contribute to superannuation?
Yes, employees can make voluntary contributions to the fund. This can be based on the tax limit.

When can superannuation be withdrawn?
Superannuation can usually be withdrawn at retirement or after reaching a pre-decided age set under the scheme.

Is superannuation enough for retirement planning?
In most cases, superannuation alone may not be sufficient. It should be combined with other savings and investments.

What happens to superannuation when changing jobs?
Depending on the scheme, the amount may be transferred, withdrawn, or taxed as income from other sources.