Superannuation Meaning

What is a Superannuation?

Employers in India often offer retirement benefits to their employees through established plans. One such tool is superannuation. Understanding the meaning of superannuation may allow employees to better plan for their post-retirement years.

So, what is superannuation in India? It is a retirement benefit wherein employers contribute to a fund or plan that grows over time. This amount is invested over the years, allowing it to grow through interest or market-linked returns, and the accumulated corpus is then used to pay the employee annuity at retirement. This strategy not only generates a consistent income for employees but also provides tax benefits to them. It can be an important part of financial planning.

 

How Does Superannuation Work?

The employer makes regular payments to a superannuation fund on behalf of employees. Companies can either administer the fund themselves through a trust or utilize a superannuation program that has been approved by the government.

Employees can also make voluntary contributions to their superannuation fund under defined contribution plans to save even more for retirement. These funds typically invest in a mix of debt instruments, fixed-income securities, and sometimes equity, depending on the fund’s structure and the employer’s policy. However, not all superannuation funds follow the same investment approach; some may be entirely debt-based, while others may include limited equity exposure. The corpus then grows steadily through compounding until you retire.

When employees retire, they can take out up to 1/3rd of the accumulated benefit. If a person gets a new job, they can move their superannuation corpus to the new employer's plan or keep it in the old fund until they retire to keep getting benefits.¹

 

Types of Superannuation

There are two types of superannuation. They are as follows –

1. Defined benefit plan

   A defined benefit plan assures a fixed pension upon retirement, providing employees with stability and a predictable income. Key features include:

   • Fixed post-retirement payout based on factors such as last drawn salary, years of service and retirement age.
   • The employer bears investment risk, providing the promised pension regardless of market performance.
   • Structured contributions from the employer fund the plan, building the retirement corpus over time.
   • Long-term financial security for employees, with a predictable monthly income.
   • Often preferred by employees seeking risk-free retirement benefits and a steady income stream.¹

2. Defined contribution plan

   A defined contribution plan focuses on contributions rather than guaranteed payouts, offering flexibility and potential growth. Key aspects include:

   • Fixed contributions from employer and employee, typically a percentage of basic salary.
   • Investment-linked growth, where the retirement corpus depends on the market performance of the fund.
   • Employee carries investment risk but gains from better returns.

   In essence, defined contribution plans offer variable retirement benefits, enabling employees to capitalize on market returns while planning for long-term financial security.

 

Types of Annuity Options Available in Superannuation

 

1. Annuity Options That Can Be Purchased Using Superannuation Proceeds

When planning for retirement, it is important to understand how the corpus accumulated through a superannuation fund can be utilised to generate regular income. While superannuation itself does not offer annuity options, the amount received at retirement can be used to purchase annuity products that provide post-retirement income.

Below are some common annuity options that retirees may consider using their superannuation proceeds:

 

2. Lifetime Annuity (Single Life)

This option provides regular payments for the rest of your life. Purchasing a lifetime annuity helps ensure a steady income throughout retirement and reduces the risk of outliving your savings, making it suitable for those seeking long-term income certainty.

 

3. Fixed-Term Annuity (Annuity Certain for a Period, Then Life)

Under this option, annuity payouts are guaranteed for a chosen period, such as 5, 10, or 15 years, and continue for life thereafter. If the annuitant passes away during the guaranteed period, the nominee continues to receive the payouts. This option offers predictability and can help meet planned financial needs during the early years of retirement.

 

4. Annuity with Return of Capital (Purchase Price Refund on Death)

In this case, the annuitant receives lifelong income, and upon death, the remaining purchase price or corpus is returned to the nominee. This option balances regular retirement income with the desire to leave a financial benefit for dependants.

 

5. Joint-Life Annuity (Spouse or Second Annuitant)

A joint-life annuity provides income to two individuals, typically spouses. After the death of the primary annuitant, the surviving spouse continues to receive the annuity, helping ensure financial security for both partners during retirement.

 

Benefits of Superannuation

1. Helps employees financially after retirement

   A superannuation fund ensures employees have a steady income once they retire. While salaries stop, living expenses continue and regular annuity income from superannuation provide a consistent source of funds. Employees can withdraw a portion of the accumulated corpus at retirement and receive the rest as an annuity payout.

   Superannuation itself does not offer annuity options. However, the corpus accumulated through a superannuation plan can be used at retirement to purchase annuity products—such as lifetime annuities, joint-life annuities, or annuities with return of purchase price—allowing retirees to choose an income structure that supports their long-term financial security. This helps retirees maintain their lifestyle and cover essential expenses without financial stress.

2. Helps employers retain employees

   Offering a superannuation fund is a strong incentive for attracting and retaining talent. Employees value retirement benefits as part of their overall compensation, which encourages loyalty and reduces turnover. Companies with robust superannuation schemes often see higher employee engagement and productivity, as employees feel secure and motivated to contribute to long-term goals. A well-managed superannuation plan enhances the employer brand, making it easier to attract top talent and retain experienced employees.

3. Tax benefits for employer & employee

   Like other retirement-linked benefits, superannuation also offers income-tax advantages to both employers and employees. These benefits, however, apply only when the contributions are made to an approved superannuation fund. Such approval must be obtained from the Commissioner of Income Tax, as per the provisions laid out in Part B of the Fourth Schedule to the Income Tax Act, 1961. The term “approved superannuation fund” is specifically defined under Section 2(6) of the Act.²

   Employees also benefit from tax advantages. Contributions made by employees to the superannuation fund are eligible for deductions under Section 80C, up to ₹1.5 lakh under the old tax regime.

 

Superannuation Vs. Other Plans

The superannuation scheme is a retirement-oriented scheme opted by employers to provide financial assistance to employees after their retirement. Other group insurance plans cater to other needs of employers and employees. For instance, the group gratuity plan takes care of the statutory gratuity payment by employers while the group term insurance plan provides employees financial security against the risk of premature demise.

So, superannuation schemes are different from other group insurance plans as they cater to a particular need of employers and employees.

 

Key Takeaways

• Superannuation is a retirement benefit where employers contribute to a fund and help employees secure a steady post-retirement income.
• Employees can also make voluntary contributions to increase their retirement corpus.
• There are two types of superannuation plans: defined benefit (fixed pension) and defined contribution (market-linked growth).¹
• Flexible annuity options and tax benefits make superannuation a vital tool for long-term financial security.

 

Conclusion

Understanding superannuation is helpful for salaried employees to achieve financial security post-retirement. This long-term savings plan helps build a retirement corpus that can be used to purchase suitable annuity products—such as lifetime annuities, joint-life annuities, or fixed-term annuities—thereby enabling a steady stream of post-retirement income, while also offering tax advantages for both employers and employees. By making voluntary contributions, you can further enhance your retirement corpus and tailor your financial plan to meet future needs.

Start planning early and make superannuation an integral part of your retirement strategy to ensure peace of mind and a comfortable post-retirement life.

 

FAQs

1. Can I make additional contributions to my superannuation?

   Yes, employees are allowed to make additional contributions to their superannuation fund¹. Such contribution is voluntary and not mandatory.

2. When can I access my superannuation?

   You can access your superannuation when you reach the age specified by the employer or under the superannuation terms and conditions³. This age can be retirement age or any age before retirement.

3. Why is superannuation important for the employees?

   Superannuation ensures a steady source of income after retirement, helping employees maintain financial independence and manage their expenses in their retirement years.

4. Can employees contribute to superannuation fund voluntarily?

   While superannuation fund is usually funded by the employer, some companies also give employees the option to contribute voluntarily. These additional contributions may be eligible for tax benefits under Section 80C (in case of old tax regime).

5. Who can receive superannuation benefits in India?

   Superannuation benefits in India are available to salaried employees enrolled by their employer. Benefits are accessible upon retirement and sometimes to nominees in case of the employee’s death before retirement.

6. Is it possible to withdraw my superannuation fund in India?

   Yes, employees in India can withdraw their superannuation fund upon retirement or under specific conditions like resignation or retirement before the age defined by the employer, subject to applicable tax rules.

7. Is there a difference between superannuation and Provident Fund (PF)?

   Superannuation is a retirement benefit that helps build a corpus, which can be used to purchase annuity products for post-retirement income. While a Provident Fund (PF) is a mandatory contribution-based savings scheme. Both provide post-retirement financial security but differ in structure and tax treatment.

8. What does it mean to retire on superannuation?

   Retiring on superannuation means ending active employment and receiving retirement benefits through the superannuation fund. It provides a steady post-retirement income via annuity payouts or lumpsum commutation.