What is superannuation?

Superannuation is a company pension scheme developed for the benefit of a company’s employees. Also referred to as a pension plan, it presupposes that funds deposited in a superannuation account will grow until withdrawal or retirement, usually without tax implications. 

According to the dictionary, superannuation meaning is to retire because of age or infirmity. A retired person with a superannuation is usually less concerned about outliving their retirement funds.

Superannuation explained

According to the superannuation plan the employer contributes to a superannuation benefit for or on behalf of employees. Companies either manage superannuation funds through their own trusts or open a superannuation fund with an approved insurance company.

This monetary fund will be used to pay out employees’ pension benefits, once they become eligible for retirement. An employee is considered superannuated once he/she reaches the specified age or is retired early as the result of an infirmity. In this case the employee will be able to withdraw benefits from the fund. 

A superannuation fund is different from other retirement investment instruments. The benefit, available for an eligible person is pre-defined by a set schedule and not by the performance of the investment. 

Types of superannuation benefit plans

There are two major types of superannuation plans: defined-contribution and defined-benefit plans.

• A defined-benefit plan is considered an employer-sponsored retirement scheme. According to this plan, employee benefits are calculated using a special formula, which takes into account different factors including salary history and length of employment. The company bears responsibility for managing the plan’s investments and related risks. Usually it hires an external investment manager for this role. Benefits can be distributed as fixed monthly payments. According to this plan, if an employee passes away, a surviving spouse is entitled to the benefits.

• A defined-contribution (DC) plan is a retirement plan which is usually tax-deferred. According to it, employees contribute a percentage of their paychecks or a fixed amount to their superannuation account intended to fund their retirement. DC retirement plans enable employees to invest pre-tax dollars in the capital market, where they can grow tax-deferred until retirement. In contrast with a defined benefit plan, a DC plan does not presuppose guarantees from the employer.

What makes superannuation different from other retirement plans 

When a person becomes eligible, a superannuation plan guarantees a particular benefit. Superannuation is not affected by individual investment choices, in contrast with other plans such as 401(k) or IRA, which will be influenced by negative or positive market fluctuations. Therefore, superannuation proposes more predictable benefits than those offered by an investment-based retirement plan.