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What Is a Superannuation Scheme?

K. Kinsella
K. Kinsella

A superannuation scheme is an employee sponsored pension plan. In some parts of the world, such as the US and Canada, the word "scheme" tends to have negative connotations; in these countries, investors tend to substitute the word "plan." While retirement plans vary from nation to nation, a superannuation scheme may take the form of a defined contribution plan or a defined benefit plan.

Investment firms market superannuation plans to major companies and government agencies because these firms have large numbers of employees. Investment firms can more efficiently market products by promoting pensions to employers rather than to individuals. Many employers tout the ability to participate in a retirement plan as an employee perk. In many nations, retirement plans grow tax deferred which means that money can grow more quickly inside a pension plan than inside a taxable investment. Since the operating costs of the investment plan are shared between the employees, the total cost per person often amounts to less than it would cost each individual to create a separate retirement account.

Woman holding a book
Woman holding a book

Defined benefit plans are a type of superannuation scheme in which participants receive predetermined monthly income payments beginning on a specific future date. These plans are funded by employers and usually take the form of group annuities. Employer contributions to the plan may vary as may the returns on the investment. Nevertheless, the investment firm operating the plan must ensure that all participants receive at least the minimum monthly payment that is detailed in the pension prospectus.

In many instances, retirement plans take the form of defined contribution plans. Employers make specific contributions to these plans on a regular basis and plan participants can also choose to add funds to these accounts. When plan participants retire, they can begin to make withdrawals from the account but the account value depends entirely on the performance of the account over the investment term. Defined contribution plans provide participants with no monthly withdrawal guarantees.

Laws exist in many nations that govern the manner in which pension plans are managed. In the United States, laws exist that prevent employers from investing the majority of the participant's funds in company stock. Australian law requires employers to make regular contributions to a superannuation scheme on behalf of employees. Many employees are also required by law to invest their own funds in these plans.

In many instances, participants cannot access superannuation scheme funds until they reach a nationally recognized retirement age. Withdrawals made prior to that age are sometimes permissible but usually result in hefty tax penalties. Some types of pension plans are transferable but in many instances, employees cannot transfer funds held in defined benefit plans when they begin working for a new employer.

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