What is a superannuation retirement fund

What is a superannuation retirement fund?
 

A superannuation fund refers to a pension scheme organisations set up for their staff and employees, often called a company pension plan. A company often avails of a superannuation policy from an insurance company on behalf of its workforce. They then allocate a certain percentage of an employee’s salary to this policy, which is usually reflected in the employee’s Cost to Company (CTC).

Upon reaching bank retirement age, one can access up to 1/3rd of the accumulated benefit from the superannuation fund. The balance is then channelled into an annuity scheme, ensuring a steady stream of pensions post-retirement. If you switch jobs, there are several paths to consider.

If your new employer offers a superannuation scheme, transferring your accumulated funds is an option. In the absence of such a scheme, you can let your savings remain invested until retirement, drawing them based on the stipulated terms. Alternatively, withdrawing funds when transitioning between jobs is also viable.

In the evolving economic environment, superannuation in India has witnessed significant growth. It serves as a safety net for employees, providing them with financial support and security as they near retirement. Awareness regarding superannuation funds is necessary to ensure employees make well-informed decisions and enhance their retirement benefits.

Calculating superannuation
 

An employer can contribute a maximum of 15 percent of an employee’s basic and dearness allowance to a superannuation fund. The superannuation amount depends on the type of superannuation fund. Usually, there are two major types of superannuation fund. These are defined benefit schemes and defined contribution schemes.

Benefits of superannuation
 

Superannuation stands as a robust financial pillar, providing a structured pathway towards a secured post-retirement life. Here are some key benefits of this mechanism:

• Tax benefits 

Superannuation funds offer tax advantages. Contributions to these funds are tax-deductible, and upon reaching bank retirement age, pay-outs receive tax benefits too.

• Financial security 

A superannuation scheme acts as a safety net, ensuring retirees have a consistent income stream. Given the rising costs of living, a dedicated retirement fund is indispensable.

• Flexible payouts 

After retirement, while a segment of the superannuation corpus is mandatorily converted into an annuity, individuals have the flexibility to withdraw up to one-third as a lump sum. This superannuation allowance can cover immediate post-retirement expenses.

• Employer contributions 

Superannuation benefits include the employer's contribution to the fund, enabling employees to accumulate savings without active contributions, though voluntary contributions are often permitted.

Informed planning

Tools like the superannuation calculator in India allow individuals to project their retirement corpus based on current inputs and projected returns, facilitating meticulous planning.

Leveraging these benefits can significantly boost retirement financial readiness.

Defined benefit schemes
 

This superannuation retirement fund calculates benefits on a predetermined basis and is fixed regardless of contribution. Superannuation benefits are based on salary, age, position, number of years of service to the employer, etc. The responsibility and risk of generating the predetermined superannuation benefits lie with the employer in this fund scheme.

Defined contribution schemes
 

This type of superannuation scheme is more common. Here the amount of superannuation contributions is fixed and predefined. Hence, superannuation benefits are calculated based on contributions, market forces, and investment performance.

Types of superannuation plans
 

While superannuation rests largely on two mainstays: the defined benefit plan and the defined contribution plan, the space for superannuation funds offers a broader spectrum. Other significant plans shape retirement benefits. Here's an overview.

• Hybrid plans 

Hybrid plans combine the best features of both defined benefit and defined contribution plans. They offer a dual advantage. A portion of the retirement benefit remains fixed and guaranteed, ensuring stability, while another part fluctuates based on the market performance of the invested funds. This kind of plan attempts to balance security with the potential for higher returns, making it an attractive option for those who seek a middle ground in their retirement planning.

• Employee choice plan 

Recognising that every employee has unique financial goals, needs, and risk appetites, the employee choice plan comes into play. This flexible plan allows employees to make an informed decision between a defined benefit or a defined contribution plan. For example, younger employees might opt for the defined contribution plan, anticipating long-term market gains, whereas those closer to retirement might prefer the certainty of the defined benefit plan. Such a choice allows employees to tailor their retirement planning according to their personal and financial circumstances.

Group superannuation cash accumulation plan
 

This plan is based on a collective contribution model. Here, both the employer and the employee contribute to the superannuation fund. The contributions are then invested in various financial instruments. The final payout or benefit an employee receives upon retirement is not just the sum of these contributions but also includes the returns earned from the investments. Given the power of compound interest and potential market gains, this plan can lead to a significant corpus by retirement, ensuring a comfortable post-retirement phase for the employee.

Superannuation from an employer and employee perspective
 

From the perspective of an employer, superannuation is an important component of a competitive compensation package. It shows the organisation’s commitment to securing the long-term financial needs of its employees. By offering superannuation, employers may attract top-tier talents because employees are highly inclined to remain loyal to a company that invests in securing their future. This financial product is not merely an instrument, but a reflection of the values held by the organisation and its dedication to uplifting and supporting its employees’ well-being.

Employers can receive tax benefits and deductions linked to their contribution towards superannuation funds, which makes it a financially sound decision, too. Additionally, a robust superannuation offering can boost the employer's brand, facilitating recruitment in competitive job markets.

From an employee's standpoint, superannuation serves as a safety net for their post-retirement phase. In the modern age, where job changes are frequent, a consistent superannuation fund accumulated over the years offers reassurance. The knowledge that a part of their earnings is being set aside for retirement can ensure peace of mind.

Superannuation diversifies employees' investment portfolios. Alongside other savings and investments, it stands as a foundational element for a stable post-retirement life. The added perk is the tax savings employees can benefit from, positioning superannuation as a harmonious blend of savings, investment, and tax strategy.

So, superannuation provides tangible benefits for both employers and employees, acting as a nexus between present obligations and future goals.

Superannuation vs. other plans
 

Superannuation is one of the many retirement-saving products, but it stands distinct from others in various respects. Here's a comparison -

• Nature

Superannuation is an employer-sponsored fund where the employer contributes tofor the employee’s retirement benefits. On the other hand, other plans such as the National Pension Scheme (NPS) or Public Provident Fund (PPF) are more individual-centric, permitting anyone to contribute irrespective of employment status.

• Liquidity

Unlike the Employee Provident Fund (EPF) or PPF, where partial withdrawals are allowed under certain conditions, superannuation funds have stricter withdrawal norms. Often, only one-third of the corpus can be withdrawn at retirement, with the rest mandatorily converted into an annuity.

• Tax benefits

Superannuation contributions by employers are exempt from tax, making it a tax-efficient product. Other plans like PPF and NPS also offer tax benefits under Section 80C, but their structure and limits might vary.

• Flexibility

Instruments like the NPS provide more flexibility in choosing the right investment mix between equities, government securities, and corporate bonds. Superannuation funds, being more employer-driven, might not offer the same choice to individual employees.

While superannuation offers a structured approach to retirement savings, primarily backed by employers, other plans offer greater individual autonomy and flexibility. The optimal approach for an individual would involve strategically leveraging a mix of these products to achieve a comprehensive and well-rounded retirement corpus.

What is the difference between superannuation and retirement?
 

Superannuation and retirement are distinct yet interlinked concepts. Superannuation refers to a specific financial instrument, primarily a fund set up by employers to ensure employees have financial support post-retirement. Contributions are made periodically to this fund and, upon retirement, the employee can access the accumulated funds either as a lump sum or as annuities.

On the other hand, retirement is the act of formally ending one's professional career due to reaching a certain age, often 60. While superannuation provides the financial means to support oneself during retirement, retirement itself marks the transition from active employment to a more relaxed phase. This is done relying on savings, pensions, and other income sources. So, superannuation is an instrument to prepare for retirement, whereas retirement is a life event itself.

What is superannuation in salary?
 

Superannuation in salary context refers to a retirement benefit provided by employers to their employees. It's a component of the compensation structure, often included in the Cost to Company (CTC). The employer contributes to this fund, with the employee having the option of contributing additional funds. In general, the purpose of a superannuation fund is to provide financial support to employees after they retire. Upon retirement, employees can either withdraw a portion of the accumulated amount as a lump sum or opt to receive periodic payments through annuities.

Tax benefits of superannuation
 

The contribution of employees to the superannuation fund qualifies them for a tax deduction as per Section 80C for up to Rs 1.50 lakh. Like most types of pension and retirement programs, the interest accrued, and the fund withdrawn from superannuation is free of tax. However, the annuities received are taxable at the income tax slab rate of the employee. The employer also receives tax benefits. Employer’s contributions to the superannuation fund are deductible as a business expense.

Key takeaways
 

Having a superannuation retirement fund offered as part of employee benefits by your employer can help you meet your retirement goals. Such schemes always supplement other retirement plans such as the Provident Fund, the National Pension System (NPS), etc.

In addition to being an effective retirement planning product, a superannuation retirement fund also offers tax benefits. Since employee contributions are voluntary, you can determine what will benefit you depending on your overall financial plan, investment strategy, and other tax-saving investments.

Conclusion
 

Superannuation serves as a significant product in retirement planning, offering both financial and tax advantages. Rooted primarily in the employer-employee relationship, superannuation funds emerge as an essential component of the compensation structure, often reflecting an employee's cost to the company (CTC). These funds aim to assist employees in building a considerable corpus by the time they reach the age of retirement, with a unique blend of employer-driven contributions and potential voluntary contributions by the employee. A noteworthy distinction lies between superannuation and retirement itself; while the former is a financial instrument designed for post-retirement sustenance, the latter denotes the phase of ending one's active professional journey.

Two prominent superannuation schemes are defined benefit and defined contribution plans, each catering to different financial dynamics. Additionally, hybrid plans, employee choice plans, and group superannuation cash accumulation plans add layers of flexibility and diversification to retirement planning. Tax benefits, consistent income post-retirement, and financial security are some of the standout advantages of superannuation. However, it's crucial to view superannuation as one facet of a broader retirement strategy. This is done by synergising it with other instruments like the Provident Fund and the National Pension System (NPS) to ensure a comprehensive financial safety net for the golden years.

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