How Does Superannuation Work?

Most of us will spend our entire working lives building our superannuation nest egg. How we fare has the power to dramatically impact our retirement lifestyle, so it’s worth spending some time learning about it.

Here, we take you through the ins and outs of superannuation process – from choosing a fund and making contributions, to how to access and withdraw your funds further down the track.

What is Superannuation?

Superannuation is a structure that is designed to hold monies that you set aside to be invested and saved for your retirement.

The superannuation fund you choose will pool your money with thousands of other members and invest on your behalf.

Generally, you can’t access your superannuation funds until you retire. But the good news is that superannuation is one of the most tax-effective ways you can save for your retirement.

Choosing Your Superannuation

In most cases, you can choose your own superannuation fund.

If you are self-employed, you are free to choose your own preferred super fund.

If you are an employee, then every time you start a new job, you will typically be required to fill out a ‘standard choice form’ – available from your employer or the Australian Tax Office – which informs your employer what superannuation fund you wish to choose.

When making your decision, it is important to consider some key factors: the fees the superannuation fund charges, their investment strategy, the fund’s past performance, whether they offer death, disability and income protection insurance; and other services and benefits they offer.

Your decision may also be influenced by what stage of life you’re at and how much risk you’re prepared to take.

Note: Some industrial awards specify a fund (or small selection of funds) that superannuation must be paid into. Check with your employer.

You can read more about your superannuation options in ‘Choosing the Right Super.’

Making Contributions to Your Superannuation

Generally, your employer is required to make compulsory superannuation contributions on your behalf. This is usually an amount equal to 9.5% of your salary – and is on top of your salary or wages.

But there are a number of ways to boost your retirement nest egg by making extra contributions to your superannuation:

  • Concessional contributions. These are contributions made into your superannuation fund before tax and may include additional concessional contributions made by your employer, salary sacrifice contributions from your pay, or personal contributions for which you claim a legitimate income tax deduction. Concessional contributions are currently capped at $25,000 a year.*
  • Non-concessional contributions. These are contributions made into your super fund from after-tax. They are not taxed in your super fund. Examples include personal superannuation contributions deducted from your after-tax pay or lump sum payments through a bank transfer. Non-concessional contributions are capped at $100,000 a year.**
  • Government co-contributions. Depending on how much you earn, you could receive a government co-contribution – up to $500 a year – if you make a non-concessional contribution into super.

*The ability to carry forward unused amounts of concessional caps is available with certain conditions. From 1 July 2019, an individual’s concessional contribution cap may be higher than $25,000 if there are unused amounts carried forward – conditions apply.

**There is an ability to use the bring-forward rules to enable contributions of up to $300,000 if Total Super Balance is less than $1.4 Million. Note the $1.6 Million total super balance test applies in order to make a non-concessional contribution of any size.

You can read more about making contributions to your super in ‘Types of Super Contributions.’

Accessing Your Superannuation

When Can You Access Your Superannuation?

While there are some exceptions, you can generally access your superannuation when you:

  • Turn 65 (even if you haven’t retired)
  • Reach ‘preservation age’* and are permanently retired
  • Reach ‘preservation age’* and commence a transitioning to a retirement income stream, while continuing to work.

It’s wise to look at your options a few years before you retire, as there are rules around withdrawing your super savings. A financial adviser can help you look at your options and guide you in making the best choice for your personal circumstances.

*Your preservation age is generally the youngest you can be to start receiving your super. See the table below:

Your date of birth Age you can access your super
(Preservation age)
Before 1 July 1960 55
1 July 1960 – 30 June 1961 56
1 July 1961 – 30 June 1962 57
1 July 1962 – 30 June 1963 58
1 July 1963 – 30 June 1964 59
From 1 July 1964 60

Source: MoneySmart

Can You Access Your Superannuation Early?

Superannuation is designed to remain untouched until you retire. However, sometimes life doesn’t go to plan – and you may need to access your superannuation (or a portion of it) early.

The limited circumstances you may be eligible to legally access your superannuation funds before you reach your preservation age include:

  • If you suffer temporary or permanent incapacity through an accident, illness or another life-changing event.
  • Serious financial hardship. If you lose your job, or are unable to work and have been receiving Commonwealth income support benefits for 26 continuous weeks – and are still unable to meet immediate living expenses. The maximum amount that can be released under serious financial hardship grounds in any 12-month period is $10,000. Note: This criteria (and the limit) is different for people aged over 55 and 39 weeks.
  • Compassionate grounds. You may be eligible to receive your superannuation, or a portion of it, under compassionate grounds. These grounds may include expenses resulting from medical treatment or medical transport; mortgage assistance; modifications to your home and/or motor vehicle required as a result of a severe disability; assistance with funeral expenses; or expenses related to a terminal medical condition.
  • Terminal illness. If you have been diagnosed with a terminal illness or injury – and your life expectancy is two years or less. To qualify, this needs to be certified by two registered medical practitioners, at least one of whom is a specialist.
  • Permanently leaving Australia. If you are an eligible temporary resident and planning to leave Australia permanently you may be eligible to access your superannuation before you retire. Overseas residents who have been working in Australia but wish to leave the country can apply to receive their superannuation money through a departing Australia superannuation payment (DASP).

First Home Super Saver Scheme

It’s no secret that the first homebuyer’s market is tougher than ever.

To help reduce pressure on housing affordability, the Federal Government has introduced the First Home Super Saver (FHSS) Scheme.

The scheme allows eligible first home buyers to save money for their first home inside their superannuation fund.

How the First Home Super Saver Scheme works

It’s simple really. Eligible people can make voluntary concessional (before-tax) and non-concessional (after-tax) contributions into their superannuation fund to save for their first home.

Once they’re ready to buy, they apply to the Commissioner of Taxation to release their voluntary contributions – along with any associated investment earnings along the way.

As part of the scheme, however, first home buyers must:

  • Either live in the premises they are buying, or intend to as soon as practicable, and
  • Intend to live in the property for at least six months within the first 12 months they own it after it is practical to move in.

Who is eligible for the First Home Super Saver Scheme?

Eligibility is assessed on an individual basis, which means that couples, friends or siblings can each access their own eligible FHSS superannuation contributions to purchase the same property.

To be eligible, you must:

  • Be over 18 years (this is the minimum age you can access your superannuation contributions)
  • Have never owned property (including an investment or commercial property) in Australia
  • Have not previously requested an FHSS release authority.

*A financial hardship provision applies to the scheme. This means that even if a person has owned property before, they may be eligible for the scheme if it is determined they suffered a financial hardship that resulted in them losing ownership of the property.

How much can you access?

There are limits to the amount of superannuation contributions you can access under the scheme.

First home buyers can apply for up to $15,000 of their voluntary contributions in a single financial year – up to a total of $30,000 across all years. They will also receive earnings associated with those contributions.

How do you release your superannuation savings?

It’s a good idea to regularly check your superannuation balance to see how much you have saved. This will help you keep track of the maximum FHSS amounts you can have released.

When you are ready to have your voluntary superannuation contributions released, you need to apply to the Commissioner of Taxation for a FHSS determination and release.

You can do this by applying online using your myGov account linked to the ATO.

Withdrawing Your Superannuation

The time is right, and you’re ready to access your superannuation. But how do you go about doing it?

You have three distinct options:

  1. You can opt for a retirement income stream (e.g. an account-based retirement pension)
  2. You can choose to receive your superannuation as a lump sum payment
  3. Or, you can have a combination of both – a regular income stream and a lump sum payment.

Withdrawing Your Superannuation as an Account-Based Pension

Withdrawing your superannuation as an account-based pension will give you a regular income stream.*

Each fortnight or month, depending on what you choose, a designated amount of money is transferred into your bank account. Your super money is progressively ‘drawn down’ until it runs out.

For many people, receiving a regular pension is easier and less stressful than dealing with a lump sum payment. And better still, the balance of your superannuation stays in your super fund and continues to grow and earn you money.

Investment returns on an account-based pension are not taxed and, if you are aged 60 years or over, your income payments will also be tax-free. (Different rules may apply to untaxed or defined benefit funds, so check with your super fund).

However, there are rules – based on your age – around the minimum and maximum amounts you must (or can) withdraw each year as a pension payment. For example, if you are aged between 65 and 74 years you must withdraw at least 5% of the balance each year as income payments.

*Note the $1.6 Million Transfer Balance Cap limit applicable to retirement phase pensions. Also, Account-Based Pensions are linked to market movements, meaning balance will erode over time and there is no guarantee that the pension will provide an income for as long as you need it.

Cashing In Your Superannuation

When you retire you have the option of taking your superannuation nest egg out as a lump sum. If you’re aged 60 or over, you can withdraw this super tax-free.

While this may seem an attractive option, it is important to note that taking out your super as a lump sum can have significant tax implications – and if you are under Age Pension Age may impact on any Centrelink payments you may have been entitled to.

If you invest the money outside of your superannuation fund, any returns will generally be taxable. And if you make a mistake or change your mind, you may find you’re not eligible to put the money back into super.

If you’re keen on cashing in your superannuation, another option to consider is leaving your money in your superannuation account and withdrawing it a bit at a time as you need it. Note superannuation is taxed at 15% on earnings whilst in pension phase, 0% tax applies.  Outside of this regime, your marginal tax rate applies.

Superannuation Lump Sum Plus Pension

Fancy a new car or a holiday, but still want to receive a regular income?

Opting to take some cash, and then converting the rest of your superannuation to an account-based pension can give you the best of both worlds.

But just remember that any monies you take out as a lump sum may reduce the amount of regular income you receive – and will ultimately affect how long your superannuation nest egg will last.

A professional financial adviser can help you work out what’s best for your individual situation.

How Is My Superannuation Taxed?

Superannuation can be taxed at three stages: when it goes into the fund (contributions), while it is in the fund (investment earnings) and when it leaves the fund (superannuation benefits).

Tax on your contributions will depend on the type of contribution and your personal circumstances. For example, employer and salary-sacrificed contributions are generally taxed at 15%, but high-income earners will pay an extra 15% if their combined income and superannuation contributions exceed $250,000.

After-tax personal contributions are generally not taxed at all as long as you remain within the contribution cap limit.

Investment earnings are taxed at a maximum rate of 15%. Capital gains on assets held for longer than a year within the fund are taxed at 10%. Investment earnings in retirement phase pensions are not subject to tax within the fund.

Superannuation benefits are taxed depending on how you access your super and your age: if you’re aged 60 or over, lump-sum withdrawals and super income stream payments are generally tax-free. However, if you access your super before age 60 you may pay tax on withdrawals.

When Is Superannuation Tax-Free or Taxable?

Superannuation benefits are typically made up of two components: tax-free and taxable.

The tax-free component includes:

  • After-tax personal contributions
  • Spouse contributions
  • Government co-contributions

The taxable (taxed) component consists of:

  • Employer contributions
  • Salary sacrificed contributions
  • Personal contributions where a tax deduction was claimed
  • Investment earnings on your super savings

Generally, your superannuation will be a combination of both tax-free and taxable components, and your superannuation provider will calculate the taxable components on your behalf.

What Are The Tax Rates on Superannuation?

Tax on your super benefits varies depending on several factors, including:

  • Your preservation age, and the age you will be when you get the payment
  • Whether the money in your super account is taxable or tax-free
  • Whether you will get the payment as an income stream or lump sum
  • The type of income stream.

If your age is less than your preservation age

Type of Super Types of Withdrawal Effective Tax Rate
(including Medicare levy)
Taxable component
– Taxed element
Income stream Your marginal tax rate – however, if you receive the income stream as a disability super benefit, you are entitled to a tax offset of 15% on the taxed element.
Taxable component
– Taxed element
Lump-sum Your marginal tax rate or 22%, whichever is lower.
Taxable component
– Untaxed element
Income stream Your marginal tax rate.
Taxable component
– Untaxed element
Lump-sum Your marginal tax rate or 32%, whichever is lower – unless the lump sum is more than the untaxed plan cap.

Source: Australian Taxation Office

If your age is between your preservation age and 60 years old

Type of Super Types of Withdrawal Effective Tax Rate
(including Medicare levy, up to the low rate cap)
Effective Tax Rate
(including Medicare levy, above the low rate cap*)
Taxable component
– Taxed element
Income stream Your marginal tax rate less 15% tax offset. Your marginal tax rate less 15% tax offset.
Taxable component
– Taxed element
Lump-sum 0%. Your marginal tax rate or 17%, whichever is lower.
Taxable component
– Untaxed element
Income stream Your marginal tax rate. Your marginal tax rate.
Taxable component
– Untaxed element
Lump-sum Your marginal tax rate or 17%, whichever is lower. Your marginal tax rate or 32%, whichever is lower – unless the lump sum is more than the untaxed plan cap, in which case the amount above the cap will be taxed at the top marginal rate.

Source: Australian Taxation Office

*The low rate cap is a limit on the amount of taxable components (taxed and untaxed element) that can be taxed at a concessional (lower) rate of tax. It’s a lifetime cap, which is reduced by any taxable component you receive from any payer after you reach your preservation age (it cannot be reduced below zero).  The low rate cap is $210,000 in 2019 – 20.

If you are in receipt of a capped defined benefit income stream

This section applies to you if you are:

  • 60 years old and have a capped defined benefit income stream
  • Less than 60 years old and in receipt of a death benefit (reversionary) capped defined benefit income stream where the deceased was 60 years old or older at the time of death
  • 60 years old or older and in receipt of a super income stream which is not a capped defined benefit income stream and you have an untaxed element
  • 60 years old or older and in receipt of a super lump sum and you have an untaxed element.

Where you are receiving an account-based pension you do not need to pay tax on the taxed element or tax-free component after you turn 60 years old. To work out how your super payment will be taxed you need to know:

  • Your defined benefit income cap (if applicable)
  • Whether the income stream is a death benefit (reversionary) income stream
  • The amount of the:
    • Tax-free component
    • Taxable component that the super provider has paid tax on (taxed element)
    • Taxable component that the super provider has not paid tax on (untaxed element).

Tax on withdrawals of the tax-free component

You don’t pay tax on the tax-free component of your super where you withdraw it as a lump sum.

You may be required to include the tax-free component in your assessable income where you are in receipt of a capped defined benefit income stream and:

  • You are in receipt of a death benefit income stream where the deceased was aged 60 years old or older at the time of death; and
  • The combined total of your tax-free component and taxed element (taxed source) is in excess of your defined benefit income cap.

The exception is where you have illegally gained early access to your super before you have met a condition of release. In these circumstances, the entire amount of your super benefit will be taxable regardless of whether it has a tax-free component.

Tax on withdrawals of a capped defined benefit income stream


Type of Withdrawal Type of Super Effective Tax Rate
(including Medicare levy)
Income stream Tax-free component and or Taxable component – taxed element is above the defined benefit income cap. 50% of the amount above the cap is assessed at your marginal tax rates. This is known as ‘assessable amount from your capped defined benefit income stream’.
Income stream Tax-free component and or Taxable component – taxed element is below the defined benefit income cap. No tax.
Income stream Taxable component – untaxed element. Your marginal tax rate.

Source: Australian Taxation Office

Superannuation Death Benefits

In the event of a person’s death, their superannuation is generally paid to their nominated ‘beneficiary’ or their estate. This is called a superannuation death benefit – and is typically made up of both a tax-free and taxable component.

Beneficiary nominations may be ‘binding’ or ‘non-binding’.

  • A binding nomination allows a person to nominate a dependent (s) and/or a legal personal representative (or Executor of the estate) to receive their super. The fund trustee will not have discretion as to who to pay the benefit to and must follow the nomination (as long as it is a valid nomination).
  • A non-binding nomination allows the trustee of the fund to use their discretion to decide which dependent(s) the death benefit is paid to. Alternatively, they may choose to make a payment to the Executor of the Will for distribution as instructed in the deceased’s will.

If you are an eligible dependent of the deceased, e.g. a spouse, you will receive the death benefit either as either a lump-sum payment or an income stream. Other dependents, e.g. adult children, will generally only be able to receive the death benefit as a lump sum.

How much tax you’ll pay on the death benefit will depend on a range of factors, including whether you were a dependent of the deceased and if the benefit was paid as a lump sum or income stream. Other factors include:

  • Whether the income stream is an account-based or a capped defined benefit income stream
  • Whether the super is taxable or tax-free (and the super fund has already paid tax on the taxable component)
  • Your age and the age of the deceased person when they died

You can apply for a Superannuation Death Benefit by contacting the deceased’s superannuation fund.


If you have any questions regarding superannuation and how the process works, make an appointment with one of our friendly and professional team and we would be happy to help.


MBA Financial Strategists Pty Ltd ABN 13 008 285 756 is an Authorised Representative and Credit Representative of AMP Financial Planning Pty Limited, Australian Financial Services Licensee and Australian Credit Licensee. This article contains information that is general in nature.  It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.

This information contained in this article may contain references to other special offers or promotions offered by persons who are not part of the AMP group of companies. AMP has not verified, and is not responsible for, the information provided by other parties or persons not part of the AMP group of companies.  Subject to any applicable law which cannot be excluded, AMP group of companies and MBA Financial Strategists Pty Ltd makes no warranties or representations regarding the quality, accuracy, merchantability or fitness for purpose of the goods or services available from these persons. Your obtaining of goods or services from these persons is at your own risk. AMP group of companies does not accept any liabilities arising from reliance on the access and the availability of the information, or fees and charges that relate to the use of such information.

Our Services

    Get In Touch

    Your privacy is important to us and AMP Financial Planning Pty Limited ABN 89 051 208 327 Australian Financial Services Licensee and Australian Credit Licensee No. 232706, which is part of AMP. You may request access to your personal information at any time by calling us on (08) 8357 3999 or contacting AMP on 1300 157 173. Information collected will be subject to AMP's Privacy Policy. You can also contact us or AMP if you do not wish to receive information about products, services or offers available from us or AMP from time to time.