What the July 1 super changes will mean for young Aussies
The first experience of super that many students have after leaving school is bewildering. Juggling different jobs with different employers, they steadily accumulate multiple small, dormant accounts that are soon depleted by fees and insurance premiums.
Anyone aged 18 and over who earns at least $450 a month is entitled to the 9.5% super guarantee (SG) contribution. However, many young workers starting out are left with a jaundiced view of super when their meagre savings are consumed by fees (see "Battle to get a refund").
Typically, they don't actively choose their super fund, which means their SG is paid into a default fund selected by their employer. Consequently, every time they start a new job another account is established.
The multiple-account problem was highlighted in last year's Productivity Commission report on superannuation, which described it as "an unlucky lottery" for many workers, with a third of accounts (or 10 million) being unintended multiples.
The report put a figure on how much this costs consumers: a staggering $2.6 billion goes into the industry's coffers every year. It said an obvious flaw was that the default fund was tied to the employer rather than the employee. Following its report, and recommendations of the financial services royal commission, legislation was passed to address the problem.
From July 1, small, dormant accounts will be given special protections in legislation called Protecting Your Superannuation Package.
When it comes to super, everything old is new again. Until 2013, accounts with balances under $1000 had a cap on fees. The fund's administration fee could not exceed the investment return. The ban was dropped with the introduction of MySuper in 2014.
Jason Andriessen, managing director of CoreData Research, says the erosion
of account balances has a huge impact on young people and is a stark example of super funds behaving in a way that is detrimental to their membership.
"That's an unconscionable situation because that wasted money is paid by members to super funds and insurance companies - institutions that are legally and morally required to act in their customers' best interests," he says.
He says many young workers shrug it off as a rip-off and treat the SG as just another tax. "It's a huge problem because these funds and insurance companies have a fiduciary, best-interest duty to prioritise their members over themselves.
"It changes the way young people think about super. It makes them cynical and less engaged. And it's happening at a time when contributing to super could make a big difference to their lifetime wealth. So just when they should be engaging with it, they are having a poor experience."
Andriessen says the multiple accounts are an outcome of a super system designed 30 years ago that is no longer fit for purpose. "We no longer have a 40-year career and then 30 years of putting our feet up. Work is far more intermittent than that, and retirement isn't necessarily a time we stop working," he says.
Active interest is key
He says the July 1 changes will lead to the consolidation of small, inactive accounts and change the economics of many super funds. "They are in the best interests of their younger members and will lead to better outcomes for them. It means super funds will need to find growth in alternative ways."
Andriessen advises students to take an active interest in their super when they start with a new employer and ensure their SG is paid into a preferred default account. They should also ensure they are being paid the correct amount.
"Recognising the amounts that are contributed in the early days will have a huge impact on what will be there at the end of your working life because of the effect of compounding. It matters even more than how the money is invested," he says.
Adrian Raftery, associate professor in superannuation at Deakin University and course director of financial planning, says the cap to stop fees from eroding small balances and making insurance an opt-in rather than opt-out is a welcome improvement.
"You don't need to have insurance if you are under 25. However, if you do have commitments, if you do get married young, or have kids young, or have taken out a mortgage or do risky work or risky sports, then I would encourage you to have insurance. There's a lot of tradies out there and they are not adequately covered."
In terms of long-term savings, Raftery says super really works. "Super is a long-term asset. The earlier you can start putting money into super the better it is. If the student were to ask their parents what they would do differently when it comes to super, many would say they wished they had started putting money into super much earlier.
"Take advantage of the super co-contribution. If you put $1000 post tax into your super, you will get $500 from the government. That gives you a 50% return automatically. Do that every year and it mounts up if you earn less than $37,000 a year," he says.
If you do change jobs, roll over your super straightaway. If you change your address, notify your super fund and make sure your fund has your tax file number.
Once you start earning a lot more and your degree has paid off, Raftery says super's tax concessions really take off. "I'd be encouraging [young workers] to start taking advantage of the favourable tax concessions around super. They're really fantastic."
Battle to get a refund: case study
It's a little-known fact that you can withdraw your super balance if it is less than $200 and your employment has been terminated. This takes into account the fate of small account balances, which are decimated by fees.
Susan Hill*, 19, found her industry fund unresponsive when she requested a refund on her super guarantee. She had worked at her first casual job over the Christmas period before starting a university degree.
After checking her super account in February, she noticed her modest SG contribution of $53 was shrinking due to a $10 deduction for insurance, $1.30 per week for administration, plus an investment fee of 0.1%. Contributions tax of 15% had also been deducted.
After her fund's call centre said there was nothing it could do to help her, she called the Australian Financial Complaints Authority. "I established that super funds are able to refund the SG to the member if the total balance is less than $200," says Hill.
After quoting the rule to more senior staff and making it clear she was studying full time, not working, and had a termination letter from her employer, her insurance premium was refunded.
But the fund held onto the rest of her money with a grim determination.
"For a student who isn't working, every dollar counts," says Hill. "All the ongoing fees mean the compulsory contribution will quickly dwindle to zero." She welcomes the July 1 reforms to protect small accounts.
"That will be fairer to students like me who were Christmas casuals but not currently working. I don't think compulsory super should disadvantage us because fees and commissions are being unreasonably taken."
Not only should her super fund have refunded her entire amount, no contribution tax is payable on any refund you receive on a balance under $200.
For details, see ato.gov.au.
*Name has been changed at the case study's request.
Protecting your super package
From July 1, a super account classified as having a low balance - that is, one with less than $6000 in it - will have fees capped at
3% to stop the savings from being eroded.
Accounts that have not received a contribution for 16 months, have balances below $6000 and show no sign of any member activity, such as investment or insurance changes, will be transferred to the tax office.
The ATO will auto-consolidate dormant accounts and reunite them with a member's active account if it can identify one. This underlines the importance of always giving your super fund your tax file number.
"There's also some protection around insurance so students and young workers don't end up with zombie insurance policies they don't require," says Andriessen. "Members under 25 will have to opt into insurance rather than opt out."