Superannuation: A guide to retirement funds

Most employers offer employee benefits to reduce employee turnover or meet governmental directives. Gratuity, provident funds, and national pension scheme are some employee benefit schemes post-retirement.

One beneficial retirement scheme often overlooked by employees is the superannuation fund. Superannuation can help employees live a stress-free and sound life post-retirement. Employees can live without financial hassles if they understand superannuation’s meaning, and benefits. 

Many employees are unaware that such a scheme exists. This is because they do not contribute anything from their salary towards Superannuation. It is not mandatory for an employer to subscribe to a superannuation scheme. So, not all employers take the initiative. 

 Let us understand more about superannuation in this article. 

Superannuation Meaning

Superannuation, also referred to as a company pension plan, is a type of retirement pension offered by certain companies to their employees. This scheme prioritises employee welfare. 

• Under this plan, an employer makes regular contributions to the superannuation fund. The contributed amount is then accumulated in the employee’s account till his retirement.
• Employees can also contribute to the fund if they wish. The company deducts the contribution from their salary.
• It’s a long-term investment for an employee’s welfare after retirement.
• The employer’s contribution to the superannuation fund is 15% of your basic salary. 
• Want to know if your employer offers superannuation benefits? You can check your cost to the company (CTC) package and find the relevant details there. 

How Does Superannuation Work? 

If your employer provides superannuation, they usually avail a superannuation benefit plan from a reputed insurance provider on behalf of the employees. A company can also manage the pension plan through its trusts. 

• The funds, which the employer contributes monthly, continue to accrue in the superannuation fund.
• The scheme continues until the employee reaches superannuation or retirement age 58 or 60 -depending on company policy.
• After retirement, an employee can withdraw 25% of the total amount in the superannuation account. 
• The remaining corpus fund provides regular annuity returns. 
• If an employee switches jobs before retirement, the superannuation amount can be transferred to the new employer, provided the new company has a similar plan. 
• Otherwise, you can leave the amount till your retirement or withdraw it with a tax levy. 

Types of Superannuation Benefits

Let us discuss the two kinds of superannuation plans. 

Defined Benefit	Defined Contribution
The superannuation benefits are fixed. They do not change with the employer’s contribution or the performance of the funds invested.	Employer’s contribution is fixed Benefits from the superannuation are not fixed.
The benefits depend on  The employee age  How long he is working for the company His position and salary	The benefits depends on The contributions made The fund performance  Market fluctuations
Pros:  Offers financial certainty You will receive a predetermined amount regularly Prevalent in the public sector and government entities Cons:  The plan is subject to the employer and insurer terms and conditions	Pros: High benefits  Easy to manage More common Prevalent in private sector companies.  Cons: Market risks and investment performance impact the employee

Other Types of Superannuation Benefit Plans 

Superannuation plans mostly come under defined contribution and defined benefit plans. Here are some other types of superannuation plans. 

• Hybrid Superannuation Benefit Plans

This plan is an amalgamation of both the defined contribution and benefit plans. In this benefit scheme, a portion of the superannuation funds have determined benefits. 

The benefits from the remaining part of the superannuation funds are subject to market fluctuations and performance. You experience the best of both worlds- income stability and potential high returns from good market performance.

• Employee Choice Plan 

This plan considers that every employee has unique needs and allows employees to choose their superannuation benefit plan at their convenience. 

• Group Superannuation Cash Accumulation Plan

This plan involves contributions from both the company and the employee. The funds collected are then invested in several financial investment mediums. The employees get the benefit of market gains and compound interest. 

Superannuation Annuities 

Superannuation annuities refer to a financial product offering regular payments that an employee is entitled to after retirement. The different types of annuities are- 

• Payable for life
• Payable for life at intervals of five, ten and fifteen years
• Lifetime pension 
• Payable jointly on the employee and spouse’s life

Superannuation- Employee and Employer Benefits 

Though the employer contribution to the superannuation fund might seem minimal, it adds up to a substantial amount to help employees and their families financially post-retirement. Employers also gain some benefits from the superannuation plans.

Employee Benefits	Employer Benefits
Provides a regular flow of income after retirement. You can withdraw only 25% of the superannuation amount as a lump sum. The remaining 75% provides a source of regular income. There is no contribution from your side.  You can withdraw the funds during illness or emergencies.  You can move the superannuation amount to your new employer.	Superannuation schemes can demonstrate employers’ concern about employees’ long-term financial security. This can translate into a path to attract and retain the right and loyal talent.

Tax Benefits 

Apart from the above-mentioned list, there is a superannuation-related tax benefit for both employers and employees.

Employer Tax Benefits 

• In India, the income tax commissioner approves certain superannuation funds if they meet specific conditions.
• If your company’s superannuation fund is approved, the employer contributions and income earned by self-managed trusts are tax-exempt. 
• However, any such contribution by the employer exceeding 12% of the employee’s salary is taxed.

Employee Tax Benefits

• Employee contributions to the superannuation fund of up to Rs.1.5 lakhs are tax-exempt under Sec 80C. 
• The interest on superannuation plans is tax-exempt. 
• Employees who withdraw a lump sum due to death or after a stipulated age are not subject to tax under the Section 10(13) superannuation fund exemption.
• When transferred as an annuity, the lumpsum withdrawal and the remaining amount are tax-free. 

Superannuation VS EPF and EPS

Superannutaion is not the only employee retirement investment option. There are schemes like the Employee Provident Fund, or EPF, commonly known as PF and Employee Pension Scheme (EPS). Here is how they compare with each other. 

Superannuation	EPF	EPS
In this scheme your employer contributes 15% of your salary every month. The contributions increases with an increase in your salary.  You get a regular income after retirement without your contribution.   Voluntary contribution by the employer and the contribution is a part of the CTC.	In this scheme there is equal contribution from the employer and employee.  You withdraw the lumpsum amount after retirement. The scheme focuses on creating a retirement corpus.  No regular income after retirement but the account does earn an interest. This scheme is mandatory	This pension scheme is similar to the superannuation.  However, the employer contribution is capped at Rs.1250 per month.  This scheme is mandatory

Final Thoughts

As an employee, you are always looking to achieve financial stability while working and after that, too. Superannuation is one of the most effective yet often neglected methods for your financial stability after retirement. We hope this guide has made superannuation’s meaning, its working and its benefits crystal clear. 

Humanize AIIf you are eyeing long-term investment and growth, as well as reducing your taxable income, superannuation would be a great choice for you.

Disclaimer: The information provided is for informational purposes only. PowerUp is not responsible for any errors, omissions, or outcomes related to using this information