What is Superannuation?

Superannuation is an investment strategy that is utilized to create a stream of income for the retirement years. The term itself is associated with retirement plans in a number of nations, including Australia, New Zealand and several member countries in the European Union. The establishment and governance of superannuation funds must be in compliance with any rules and regulations that are enacted and enforced through the national or local governmental agency. This process protects the interests of individuals, since it minimizes the potential of becoming involved with a fraudulent retirement scheme and losing a great deal of money.

Individuals who save money routinely and place those funds into some type of interest bearing account are in effect engaging in the process of superannuation. Participation in an employee sponsored retirement plan, such as a defined-benefit pension plan or 401(k) plan is also considered one of the means of engaging in the process of superannuation. This means that individuals may enjoy the benefits of a superannuation fund as the result of working for others throughout their lives, or by establishing their own independent pension plans if self-employed.

There are two basic types of superannuation funds. One is known as an accumulation fund. In this scenario your individual or company pension plan is structured to generate a benefit based on how much is contributed to the fund up to the point of retirement. That amount takes into consideration any expenses associated with the fund, as well as how well the investments that support the fund perform over the years.

A different approach to superannuation is known as a defined-benefit fund. This model is often used with employer sponsored pension and retirement plans. In this scenario, the amount contributed to the fund by the employee is only one factor in calculating the amount of the retirement benefit. A specific formula is used that allows for the number of years the individual is actively employed with the firm, and the age that the employee reaches before choosing to retire.

Within these two broad categories, other sub-groups of superannuation funds may be created. Insurance benefits, including life insurance and disability coverage may be included. Along with contributions made by an employee, an employer may contribute a certain amount to the fund each year. Typically, the amount of that contribution will account for a fixed percentage of the employee’s gross income for the calendar year, although some businesses will utilize some other criteria to determine the amount of the contribution.