What is Superannuation and Why Does It Matter | Motilal Oswal

Superannuation and Its Importance

Employers make available several benefits to employees after retirement. This is done, either as a statutory mandated regulation or in some cases, voluntarily. These benefits are offered to employees while an employee is working for the company, or at the start of the employment. The reason is so that employees remain in the job for a long duration. The many benefits are known as superannuation.  

About Superannuation

Superannuation is the term that constitutes a list of benefits that are given to employees on retirement. They may include gratuity, National Pension, provident fund, etc. Typically, when employees become part of a given company’s staff, they tend to ignore this kind of benefit totally. In many cases, employees have no idea that they have been given a superannuation advantage. This is because this superannuation fund is collected on behalf of the employee and does not typically come from the employee’s salary. It is a contribution directly from the company. In some companies, however, superannuation policies deduct a part of the employee’s salary and collect it as part of the superannuation. Here, superannuation is a combination of employee salary and employer contribution. It's imperative to know about superannuation for the simple reason that employees can plan their future financial portfolio with efficiency. An interesting thing to note is that the word ‘superannuation’ means retirement. The term is used interchangeably with the term ‘company pension plan’. 

 

Superannuation Benefits

Company pension plans are based on different packages offered by various companies to their employees, and consist of the following: 

 

  • Defined Benefits - These are fixed plans that contain funds that are pre-determined based on criteria of employment such as the number of service years, age, salary, etc. The funds given to an employee on retirement are calculated according to a fixed formula and then dispersed based on this. 
  • Defined Contributions - Contrastingly, these benefits are decided based on market factors, and the contribution that the company can make depending on its position in the market. This is not decided by a pre-existing formula. 

 

How It Works

 

As mentioned earlier, a superannuation fund is started by a company and works towards a benefit for employees when they retire. In essence, the employer makes contributions toward a fund that is meant for all employees collectively. Companies either start their own superannuation fund (with the aid of their trusts), or start a fund with an insurance company, such as LIC or ICICI. 

 

Why It is Important

 

If you are an employee, you would wish to know how you are going to fund your retirement. You may think of using your savings for investment to grow your wealth, for instance. In this respect, you may want to know how superannuation can help you. If you plan to invest your wealth wisely, you may start investing in stocks and trade with a reputed brokerage like Motilal Oswal. 

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