As a salaried employee, you may have come across the term ‘superannuation’ at work. If you’re like most salaried professionals, you may have a vague idea of what this term means. But if you want to understand thoroughly what superannuation is, how the benefits offered at superannuation work and the other key details about this concept, you’ve come to the right place.
In this article, we’ll explore the meaning of superannuation benefits and discover the types of superannuation plans commonly available.
What Is Superannuation?
Superannuation essentially means retirement. The term is also used in everyday conversation to refer to the benefits paid out to an employee at the time of superannuation or retirement. It is also known as a company pension plan.
Today, most employers in India offer some kind of retirement program for their employees — either in accordance with the statutory retirement schemes in India or under a voluntary pension program. Unfortunately, not many employees are aware of the amount they are entitled to receive from the superannuation fund, much less of the fact that they are eligible for the benefit itself.
How do Superannuation Benefits Work?
The exact manner of working varies from one superannuation program to another. Most employers in India have superannuation funds set up as per the schemes notified by the Pension Fund Regulatory and Development Authority (PFRDA). In these programs, both the employer and the employee contribute a defined portion of the employee’s salary to the superannuation benefit.
However, some employers may also have additional or alternate voluntary schemes to provide superannuation benefits to their employees. Here, it’s generally only the employer that typically contributes to the superannuation fund.
What Superannuation Means for the Employer and the Employee ?
To better understand the meaning and implications of superannuation, let’s take a closer look at the benefits from the employers’ as well as the employees’ perspectives.
For Employers:
For employers, superannuation signifies a commitment to their employees’ long-term financial well-being. They’re either mandated or choose to contribute a certain percentage of the employee’s earnings into a superannuation fund. This not only ensures compliance with legal requirements but can also enhance an employer’s attractiveness in the job market.
For Employees:
For employees, superannuation benefits are a vital component of the overall compensation. Over time, these contributions grow to provide a substantial nest for retirement. Additionally, these funds may even offer tax advantages, making them a preferable method to save for retirement. Superannuation benefits also serve as a bridge between an employee’s working life and retirement, ensuring financial stability in the latter phase of life.
Types of Superannuation Plans
Employers may offer different types of voluntary superannuation plans for their employees. While the exact terms and conditions of these schemes will no doubt vary from one employer to another, they can broadly be classified into the following types of plans.
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Plans with Defined Benefits
As the name indicates, the superannuation benefits offered under these plans are predetermined. Rather than the contributions made to the scheme, the benefits paid out under these superannuation plans depend on other factors like the employee’s salary, the number of years in employment and the vesting period of the benefits. The risk of ensuring that these predefined benefits are available to the employee falls entirely on the employer.
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Plans with Defined Contributions
Here, the benefits are not fixed in advance, but the contributions to be made to the superannuation scheme are predefined. The contributions may be defined as a fixed sum or as a percentage of the employee’s salary. The benefits ultimately depend on the total contributions made and the performance of the markets in which the funds are invested. The risk, in this case, lies with the employees because the amount that will be paid out at retirement is not known in advance.
Benefits of Superannuation
A superannuation scheme is beneficial to employees in many ways. Depending on the particulars of the scheme, employees get to experience the following advantages.
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Affordable Retirement Benefits
Superannuation schemes are typically extremely affordable. In most cases, the employee only has to contribute a small percentage of their salary to the superannuation fund. In others, like voluntary schemes, the employee need not contribute at all. So, the cost of building a retirement corpus through a superannuation scheme is extremely low when compared with many other avenues.
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Simple and Straightforward Schemes
Superannuation plans are generally straightforward and easy to understand. Even employees who do not have an extensive idea of what retirement benefits are and how they work typically find it easy to comprehend superannuation schemes. This makes it easy for eligible employees from all walks of life to choose the particulars of their plans.
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A Wide Range of Investment Options
Some superannuation schemes also give employees the option to invest in a wide range of assets and asset classes like debt, equity, hybrid funds, money market instruments and more. This kind of diversification across different asset classes and sectors reduces the overall risk the capital is exposed to and helps the employee build a sizable retirement corpus.
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Easy Transferability
Over the course of your employment, you may switch jobs from one employer to another. The good news is that many superannuation plans are transferable from your old employment to your new job, so you can continue to reap the benefits of the scheme till you retire. This benefit is generally available for statutory superannuation schemes and not voluntary plans.
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Guaranteed Benefits
The benefits offered by superannuation plans are generally guaranteed in one way or another. In some cases, they may be guaranteed but not defined, in which case the employee will receive superannuation benefits based on how the investments perform. In other cases, they may be guaranteed and defined, meaning that the employee will know the exact amount of benefits that will be paid out.
Conclusion
This sums up the key details you need to know about what superannuation is, how superannuation benefits work and the different types of plans offered by employers. If you are a salaried employee, ensure that you are aware of the superannuation scheme(s) offered by your employer — whether they are voluntary or statutory. This way, you can include this information in your retirement planning and bridge any financial gaps that may be present.
FAQs
Are all employees eligible for superannuation benefits?
The exact terms and conditions for eligibility vary from one employer to another. In the case of mandatory schemes, it also depends on the terms set by statutory bodies like the Pension Fund Regulatory and Development Authority (PFRDA).
How are superannuation benefits different from retirement benefits?
Superannuation benefits fall under the broader category of retirement benefits. In essence, superannuation is a specific kind of retirement benefit that is typically associated with a company pension plan. It may be statutory or voluntary.
How can I check if I am eligible for superannuation benefits?
You can get in touch with your employer to check whether you are eligible for any specific benefits under the superannuation schemes they offer, if any. Alternatively, you can also read up on the common schemes that employers offer to help employees build a superannuation fund.
Can I opt out of a superannuation scheme?
That depends on the fine print of the scheme and the terms and conditions set by your employer or any statutory regulatory body, as the case may be. That said, it is always a good idea to ensure that you continue to contribute to your superannuation fund throughout your employment, so you can retire comfortably.
Who contributes to a superannuation scheme: the employer or the employee?
In most schemes notified by the PFRDA, both the employer and the employee need to contribute to the latter’s superannuation fund. However, some employers may have voluntary schemes that do not require employee contributions.
