The Power Of Compound Interest On A Superannuation Fund

The compounding nature of superannuation means small losses early in your career can lead to significant losses later on – but it also means that making voluntary contributions can make a big difference.

Every year, money goes into your super fund, as paid by your employer. This is determined by the super guarantee rate, which is currently 11% of your wages. Your super fund than pays you interest or earnings as well (on top of this) from the returns on the investments they’ve made with the money in the fund.

Generally, your superannuation is not available to draw from unless it is due to an early condition of release. However, during the height of the pandemic in 2020, the Australian government implemented an early-access super scheme (where individuals could take out up to $20,000 from their super).

From a survey conducted by the Australian Institute of Family Studies, many of those who partook in the scheme and used the funds withdrawn to at least partially alleviate financial hardship and stress during the pandemic. This may have included paying off the mortgage, paying rent or even easing the burden of buying groceries.

However, this may have resulted in them losing out on the benefit of that additional $20,000 compounding over time in their fund.

Compound interest results from an investment over time. This is because the interest is generated based on the amount within the fund in that year and then added to the fund. This is the total that the following year’s interest will be calculated based on.

Take, for example, an 18-year-old individual with $5,000 in their superannuation fund. If this amount accumulates interest at 7% per annum, this could increase exponentially by the time they reach their preservation age.

Over 55 years, the accrued interest at the rate of 7 per annum from that initial $5,000 could total over $200,000 (potentially). Compound interest on this superannuation fund could assist them year after year with increased gains and profit.

If you were to take out $20,000, you have lessened the amount that the interest can be calculated on, and the growth potential.

But that is where voluntary contributions can assist.

You can make voluntary contributions to boost your super account over time, up to a specified cap. If done in a specific way, it can also reduce the tax you pay.

For more information about how you can make voluntary contributions, including caps, methods and tax opportunities, it is best to speak directly with a professional or licensed adviser.