Seven steps to set up your super for success
Even though Australia has a world-class superannuation system, if you make an extra effort now to understand it and grow your share you can be confident you will have the financial means to fund that dream retirement.
What's not to like about building wealth in a tax-advantaged, low-fee, high-performance environment? That's essentially what super is all about. But for super to be as financially rewarding as it can be, it requires commitment.
The total amount held in superannuation has doubled in the past 10 years - from $1.5 trillion in 2012 to $3.3 trillion in 2022, showing its rising importance as a driver of financial security in retirement.
And while for some people that stage of life might seem a too-distant concept, for super to effectively build over time, we need to be thinking about it now.
Next to their home, superannuation is the second most significant asset that most people will own in their lifetime.
Whether you're just starting out, have experienced a setback after dipping into your super during the pandemic, or you're looking to further strengthen your position, we've drawn up a checklist to assist you on your journey.
From reviewing your super regularly to making sure your paperwork is up-to-date, if you put in the effort, giving your superannuation all the love and attention it deserves, you'll reap the rewards when it matters most.
1. Check your fund's performance
For starters, make sure your compulsory 10.5% contribution - or super guarantee (SG) - is being paid into your super account.
"Those are the contributions your employer is deducting and are part of your earnings. Make sure they are finding their way to your fund," advises Martin Fahy, CEO of the Association of Superannuation Funds of Australia (ASFA).
"Many people will land up in a default balanced fund. If you've got more than one super fund, consolidate them."
Australians have more than $20 billion stashed away in lost and unclaimed superannuation accounts, and billions more sitting in inactive accounts. Consolidating is free and just about every super fund has a feature on its website that will help you find your lost or inactive super.
The default product, referred to as MySuper, is a simple, low-cost, easy-to-compare product that provides a basic level of life cover. It's where most fund members have their money and where regulators, researchers and consumer groups focus most of their attention.
To help consumers monitor their super, a lot of thought has gone into the design of the MySuper product. For instance, your fund's website gives its key performance indicators on its "dashboard". It shows its latest returns, its return target above the consumer price index (CPI), its level of investment risk and a statement of fees and other costs.
It's also important to understand the fund's relative performance. You can go to the Australian Tax Office website to find out your fund's long-term performance.
The ATO's comparison tool allows you to filter out a shortlist of four MySuper products for a detailed comparison. It will give you results based on seven-year returns and annual fees based on an account balance of $50,000, as well as the ability to download their product details.
You can get a more personalised comparison, or tailored results, based on your current balance and age, if you log into the myGov site. You can also use it to transfer your super if you decide to consolidate or change funds.
If you are in MySuper, you can switch to other diversified investments, such as growth and conservative options. A growth fund invests in shares and property and offers higher returns but is more volatile, while a conservative, defensive option offers lower risk in exchange for lower returns.
"Check the investment option you are in and that it reflects your needs. A younger person can afford to take a bit more risk given they've got decades to accumulate earnings before they get to retirement," says Fahy. "Engage with your fund so that you can start to understand to what extent your investment option is aligned to what you need in a broader sense."
2. A little goes a long way
"If you can make even a small, discretionary contribution in your 20s and 30s, the compounding effect of that money between now and when you are 67, as you transition to retirement, can be substantial," says Fahy.
"When you don't have family commitments, don't have mortgage commitments, that's a good time to make additional voluntary contributions.
Those small amounts can make a big difference if they've had the benefit of compounding over three to four decades, which is the case of somebody in their 20s these days.
"For most people in their 20s and 30s, who don't own a home, their super is their single biggest asset. They'd be surprised as to how well it's been going even in the face of the current downturn and economic turmoil."
Those discretionary contributions can also build a buffer to cover periods when you might need to take time out of the workforce to retrain or upskill or for parental leave.
"We need to be conscious of the fact that in a dynamic, innovative, increasingly competitive global environment, there will be dislocation in the labour market.
"We're going to have more varied lives between 20 and 67 and voluntary contributions can help offset the effect of it.
"Those discretionary amounts also mean you are more likely to be insulated against the spectre of inflation in terms of increasing aged care costs and increasing healthcare costs, all of which are likely to put pressure on retirement savings in the coming decades.
"As hard as it is for 20-year-olds to think decades ahead, what we know is nobody ever retires saying I wish I had put less into super."
"Increasingly super is finding its way into the psyche of Australians. I think it is becoming part of the national conversation.
"As the pool of savings has grown to $3.3 trillion, one of the good things that has come from the scrutiny and discussions, be it in the political environment, be it in the business news, is that people are increasingly aware of the benefits of the compulsory, universal system that we have in Australia."
3. Even small fees add up over time
Fahy says if you've got more than one super fund, consider consolidating them. And check that you are paying an appropriate level of fees.
"We've had significant changes in super through eliminating unnecessary duplicate super accounts and unnecessary insurance to try and cap fees."
The less you pay in fees, the more there is for you. The fees you pay are based on your balance and sometimes your age. Remember, even small charges add up over time.
The tax office comparison tool also shows you what fees the different funds charge. The good news is that MySuper fees have been falling steadily as a result of competitive pressure, with many funds now charging less than 1%.
"Check that the insurance that is attached to default super is appropriate to you," says Fahy. "Seventy percent of life cover in Australia comes through group insurance. It plays an important role in alleviating hardship from tragedies that can impact people. The advantage of group insurance is you benefit from the buying power of a large number of people.
"The big thing is, look at your statement and if you don't understand it, if there's something on your statement that doesn't make sense, contact your fund and ask them about it. They'll be more than happy to explain it."
4. Insurance could be a lifesaver
Depending on your circumstances, insurance cover may be essential so your loved ones are left financially secure with a comfortable lifestyle in the event of your death.
"Ensure you have adequate life cover, which may mean not just insuring for an amount that will discharge the mortgage," says Colin Lewis, head of strategic advice at Fitzpatricks Private Wealth.
"If you require more cover than the default (basic) cover offered by your fund, then you will be required to provide detailed health information."
A benefit of having insurance inside super is that if you're getting a tax benefit on your contributions (the 15% concessional contribution tax compared with your personal tax rate), then you're effectively getting a tax deduction on your insurance premiums, says Lewis.
"Also, the premiums are funded from your super account, so if cashflow is an issue, they will not be a drain on your hip pocket. By the same token, make sure you're not paying for cover you don't need, otherwise it will be eroding your retirement savings."
You can also have total and permanent disability (TPD) insurance and income protection in super. "Be aware that TPD insurance cover in super is an 'any' occupation policy, as opposed to 'own' occupation, meaning it will be harder to qualify for an insurance payout as you'll need to be unable to do any kind of work to qualify - not just unable to do your own job, for which you are qualified by training or experience. If you want an 'own' occupation policy, you'll need to take it up outside of super."
People often get tripped up when it comes to life insurance, because they don't understand the strict rules that apply when it comes to nominating beneficiaries.
They often mistakenly assume that their death cover payout and their super balance will be covered by their will.
Young fund members with no dependants often nominate their siblings or their parents as beneficiaries. However, the death benefits can only go to "dependants" or a legal personal representative.
"If you die, your super can go to anyone you want, but your super fund can only pay it directly to certain beneficiaries - your spouse, your children, someone financially dependent or interdependent on you.
"If you want it paid to anyone else, say a parent or sibling, then your benefits must go via your estate. In that case, you need to nominate your legal personal representative - the executor of your estate - and have a will in place nominating your beneficiaries."
The other issue is how tax is applied on the benefits.
"Your benefits will be paid tax-free to your spouse, a child under 18, a financial dependant or interdependant. If your super goes to anyone else, say an adult child, the taxable component of your benefit will be taxed at 17% and if it includes insurance proceeds at 32% (both include the Medicare levy).
5. Look after your beneficiaries
To complicate matters more, depending on the fund you are in, your death benefit nomination may be binding or non-binding, lapsing or non-lapsing.
"There are pros and cons of each, so choose the type of nomination depending on your circumstances," says Lewis. "If you are in a blended family or have a vulnerable beneficiary and wish to make specific arrangements with peace of mind, then a binding nomination may be the way to go."
A binding nomination means your fund must pay the benefits to those you have nominated in the proportions you want. If you don't make a binding nomination, your fund has some discretion as to how it distributes your money to your dependants. It will also take longer to distribute.
Binding nominations normally lapse after three years, so you need to stay on top of it and renew it in time, although most funds will notify you in advance.
The alternative is to have a non-lapsing binding nomination. As this is a complex area, you might want to seek professional advice and have the peace of mind that goes with it.
"If you have a super pension and want income payments to automatically continue being paid on death to your spouse, then you can set up a reversionary pension," says Lewis. "Death benefits paid as an income stream are tax-free where the deceased was, or beneficiary is, aged 60 or more."
It's important to review your situation and check your paperwork if your circumstances change.
Separation and divorce are a biggie.
"In the event of a relationship breakdown, your super will be treated as matrimonial property and split according to any binding financial agreement or Court Order.
"It would be sensible to update your death benefit nominations to avoid any unintended consequences," advises Lewis.
6. How well are you being served?
Super comes with a great many complexities and interacting with a responsive super fund that is effective at taking you through your options and helping you make an informed decision is very important.
Xavier O'Halloran, director of Super Consumers Australia, an advocacy organisation, says funds can provide a range of support to help you make financial decisions, ranging from factual information up to personal advice for your situation.
"There are two main ways you can get financial advice from your super fund," he says. "One is something known as intra-fund advice, which you already pay for through super fund administration fees. Intra-fund advice is limited to the basics - it covers the products that the super fund has on offer, like insurance and investment options.
"The second form of financial advice a super fund can offer is more comprehensive. Your fund may have advisers that work in-house or outsource to another service provider. You can also find this type of advice external to your super fund.
"You'll need to pay for this advice on top of what you're already paying your super fund and, depending on the complexity, generally it can cost between $2000 and $5000. The advantage of this advice is it can cover a broader range of issues, like more appropriate products or strategies outside what your super fund has to offer."
O'Halloran says the quality of financial advice being delivered to consumers at the moment is essentially unknown.
"There were reforms made to improve the quality of service after the banking royal commission made damning revelations about financial advisers placing their own interests ahead of their clients.
"In the past, the regulator, the Australian Securities and Investments Commission, has done what is known as a 'shadow shop' to test the quality of advice being delivered to consumers. Unfortunately, we've not had one since this latest round of reforms.
"This is really concerning because there is currently a government review under way to review the quality of advice, but it doesn't have up-to-date information on the quality of advice to base its decisions."
7. Make your savings work harder
There are a lot of simple steps you can take to make the most of your super, says Xavier O'Halloran.
"Firstly, track down where all of your super is - some people have lost or unknown accounts that they may want to consider consolidating to save on fees and insurance.
"Before consolidating the accounts, check if you've got insurance bundled with your super, its cost and what protection it offers."
If its insurance cover is superior and you have had health issues, you might want to keep it going and leave enough in the account to cover the annual premiums.
"It has never been easier to compare superannuation funds," says O'Halloran.
The ATO's YourSuper comparison tool tells you whether your fund has passed a basic fitness test.
Super Consumers points out that the performance of your super fund can have a massive impact on your retirement income.
"For example, the Productivity Commission found the difference in savings between a typical full-time worker in a bottom-quartile fund and one in a top-quartile fund would be a staggering $660,000."
What's not to like about savings of that magnitude?
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