Outline:
- Compulsory savings program that scoops 9.5% of your pay packet.
- A pool of money that is invested in other assets that hopefully grow over time.
Superannuation is not an investment asset.
Instead it's an organisation (or fund) that invests your money on your behalf. So, rather than directly investing, your money is used to buy units in that organisation.
The number of units you receive is based on the unit price. For example, if the units are valued at $1 and you have $1000 in your super you will have 1,000 units. Your super fund pools all its members money together and then invests that pool in assets, such as shares, property and other financial instruments.
When people retire, they withdraw their money from the giant pool. The hope is that these assets will increase in value over time - the pool will get larger - and your exposure to these assets will be worth more.
If the underlying assets increase in value, your unit price will increase. And when it's time to withdraw your money, hopefully the pool is much larger than when what you originally contributed.
If your unit price has increased from $1 to $1.20, the super you can withdraw is $1200 - up $200 on the amount you contributed.
Trusts
Superannuation funds are set up as trusts, with the purpose of holding the investments assets (the shares, cash, property and fixed interest) for their members who are saving for their retirement.
Trusts are an old legal concept and impose obligations of general trust law.
This ensures the fund is always acting in the best interests of its members and protects the assets from being used by the trustee for their own benefit.
Savings
Let’s be honest, saving is hard.
Couple that with our general preference for payoffs that arrive sooner rather than later, and we can be in quite a precarious position when it comes to saving.
(That payoff preference is called mental accounting: in our minds we'd prefer to contribute $1000 towards a new iPhone, rather than than put it in the bank for 30 years.)
This preference, and the fact that life can be expensive (smashed Avocado breakfasts aren't gettin' any cheaper), basically means the government doesn't trust us to save by ourselves for retirement.
Paul Keating was the Prime Minister in 1992 and made the decision that Superannuation was compulsory and would go straight from our employer to our super fund — no passing Go, no collecting $200. This money never hits our bank account.
The first contributions started at 3% and now 9.5% of our pay packet goes straight from our employer to our superannuation fund. This is called the Superannuation Guarantee.
By making people save 9.5% per year we have seen superannuations assets climb — they’re now at an aggregate amount of $2.3 trillion.
