The superannuation system is also geared against young people, many of whom have had their superannuation savings eaten by fees and the fund closed. Where does their money go? Much of it might be eaten up in insurance premiums.
Superannuation funds charge premiums for death and TPD insurance to provide for their dependents if they die or are disabled. But few 18 to 22 year olds have dependents.
While payouts are useful if there is a death or disability, what is the point if the insurance fees dissolve the superannuation balance, the fund closes and young people have neither a super balance nor insurance cover?
It certainly sours young people’s experience with what is considered to be one of the best retirement income systems in the world.
“It is a very sad introduction to retirement savings for young people,” says Jeff Humphreys, principal of CHR Consulting, who consults superannuation funds about their insurance arrangements. “It is harsh on the young.”
Clearly the superannuation system is letting down young people.
Particularly when the Superannuation Industry Supervision (SIS) Act (Section 52) includes a covenant that states that insurance should only be offered if it doesn’t inappropriately erode retirement income of beneficiaries.
Under MySuper all fund members opt in to insurance which is a problem for young people.
Financially literate parents know if young Australians can get some superannuation savings into a fund when they are young, it will compound over the years and be very valuable. $500 saved in super when they are 18 will result in $4000 when they retire.
People can opt out of insurance – but they don’t. Insurance premiums are going up too. Australian superannuation funds’ paid 23% more in insurance premiums in 2015 than they did in 2014 according to APRA’s superannuation fund statistics. The total insurance premiums make up around 9.1% of members’ superannuation contributions.
Humphreys says some premiums – which had been slashed by some funds in 2012 – went up sharply in a rebound because of higher claims as some law firms chased payouts (and took a high fee) and awareness grew of mental illness being covered by insurance in super funds. Humphreys says premiums have levelled off in 2016.
Some smart superannuation funds have looked at members’ circumstances and have put in place measures to prevent balances from eroding. But these are rare.
Humphreys says more superannuation funds have to look at how much cover is appropriate for young members and review their insurance arrangements. Is the premium rate commensurate with the claims rate?
How to stop super being eaten up by fees
- Choose a superannuation fund that has specialised insurance for young people.
- Choose a super fund that protects low balances.
- Encourage young people to put in a tax return so that they are given the low income tax offset.
- Encourage your kids to opt out of insurance when they are young but remember that they need to turn it on when they have dependents.