It may seem surprising, but a lot of Australians aren’t sure what happens to the super contributions made by their employers. Around 14 per cent of Gen Y had never, didn’t know how to, or couldn’t be bothered to check their super fund, according to a study from Finder.com.au. It seems, however, that super funds are well aware of this confusion or lack of interest and count on it. According to money expert Bessie Hassan from Finder.com.au, only 42 per cent know how much they have in their super fund.
What Fees are You Paying?
Administration, investment, exit, and switching fees are just some of the charges deducted from super balances, some of those on a regular basis. Those costs can add up and eat away at your savings, particularly if you don’t have a regular contribution going in or if you have more than one super account. On top of this, super funds will often provide customers with a default insurance option, meaning an insurance premium will also be deducted from the balance of the account.
Why do people get insurance through their super fund? There are a few compelling reasons including cost, convenience, easy acceptance and flexibility with cover. Firstly, as funds purchase policies in bulk, they’ll often be cheaper than for individuals. Secondly, premiums are deducted from the balance of your fund, so it’s straightforward and easy to manage. Thirdly, some funds don’t require you to do a health check. Lastly, you can generally decide the amount of cover you need. So, for people who otherwise wouldn’t have any form of life insurance, superannuation is a simple way to manage it.
That all sounds great, except there are some major limitations, particularly for young people. Firstly, default cover is limited and not tailored to the consumer. Secondly, it’s not portable so you can’t take your cover with you if you change funds. Thirdly, if you make a claim it could take a long time to get any money. This is because the insurer will pay the super fund who will then pay you. Lastly, premiums can rise if you switch jobs as some funds default members as smokers or blue-collar workers.
Are New Government Super Measures the Answer?
The federal government proposed the ‘Protecting Your Superannuation Package’ in the 2018/19 Federal Budget. This will come into effect from July 1 2019. Insurance will now be opt-in rather than the current default, opt-out system. This will apply for super members under 25, accounts that have not received contributions in 13 months, and members with balances less than $6,000. Admin and investment fees will be capped at 3 per cent on low balance accounts with less than $6,000, and all exit fees have been banned. Australians paid over $52 million in exit fees 2016/17.
These measures seem are a positive step towards protecting young people and those with small balances from unnecessary fees. However, with less people opting in, premiums will rise for those who want to keep their cover. Rice Warner published the ‘Federal Budget Impact – Insurance’ report and believe the new system will raise default premiums. They estimate that the cost for Income Protection (IP) will go up a huge 20.4%. Death insurance and Total and Permanent Disability (TPD) will increase by 6.6% and 8.2% respectively.
So What is the Answer?
As we reported last month in the article “How Health Insurance Discounts Really Affect Young People”, insurance companies rely on young people paying fees for services they are far less likely to use in order to ensure policies remain affordable for everyone. It’s hard to keep everyone happy – opt-in super insurance benefits young people and those with small balances, and the current system keeps premiums down for those who rely on their super insurance. You should consolidate your super, either through your fund or the MyGov website. By keeping your money together, you minimise fees and make it easier to keep an eye on the account. Always keep your personal and contact details updated so you don’t miss important updates from your fund.
Words by Isabelle Laker