If you care deeply about addressing climate change and inequality, as Future Super members do, then the recent Federal Budget was entirely disappointing.
It was an opportunity to invest in a fairer, clean energy future. Instead of an investment in a better future, money was given back to (mostly) wealthy Australians in tax cuts.
However, budget night was also used to announce potential changes to superannuation called Protecting Your Super. These changes could be good news for younger super members and members with low super balances.
The headline proposals would seek to limit the fee gouging that often sets back Australians from being able to build up their super balances in the early years of their employment, and this is good news.
Here's our wrap up of the 5 budget take-homes you might have missed.
1. The big super funds are bad for small balances
If you’re young, just starting out in the workforce, or working part time, then you might find it hard to build up your superannuation balance. This is because set dollar member fees and default life insurance payments may be being deducted from your account at a faster pace than you’re making contributions. It's hard to get ahead when young Aussies lose up to $200 million a year from their super in unnecessary life insurance.
While the percentage based fees that get charged by super funds get most of the attention in the debate about super fees, these are not the fees that are holding back the super balances of young Australians. As an example, if you have an account balance of $500 and you’re paying a 1% management fee, then that’s a cost of just $5 per year. As long as your super fund is investing your money well and earning an investment return higher than 1% before fees, then your super balance should be going up.
But if your super balance is $500 and you’re paying a $100 member fee per annum, then that’s the equivalent of paying a 20% fee. There have been very few years when investment returns have been so good that they could compensate for a 20% fee charged on your super.
2. “Member Protection” is making a comeback
Those old enough will know that super funds weren’t always allowed to erode the balances of lower balance members with set dollar fees. Up until about 10 years ago, there was a regulation called member protection that banned super funds from charging set dollar administration fees on balances below $1000.
This protection for younger and low balance super members was scrapped after lobbying by the super industry.
The changes proposed on Tuesday night would limit the total fees a super fund can charge to 3% per annum, including set dollar fees, on accounts balances of $6000 or less. If passed in to legislation, it will be a good step forward in once again protecting the super of young people.
Future Super has always had Member Protection
The law requiring member protection may have been scrapped 10 years ago, but it has been an important feature of Future Super since we launched in 2014. Future Super members with account balances of $1000 or less have never been charged a set dollar administration fee. This makes Future Super one of the cheapest and fairest super funds for Australians who are young or just starting out in employment.
3. Is death cover killing your super?
If you’re in a MySuper or “default” super option chosen by your employer, then there’s also a very high chance that you’re paying for life insurance that you didn’t ask for. Most super funds offer life insurance on an “opt out” basis, meaning if you didn’t tell your super fund that you don’t want it, then you’ll be charged for it.
Life insurance for young people isn’t cheap, and many people under the age of 25 don’t want it. If the person with a $500 super balance is a 21 year old male in a part-time blue collar job, then he could be paying over $400 per annum in insurance premiums that he didn’t ask for. When you combine this with a $100 annual set dollar fee, then this member doesn’t have any super left.
The Protecting Your Super changes would prevent super funds from automatically charging young people for insurance that they may not want. If you’re under 25 years old, or have a balance under $6000, or haven’t made a contribution to your account in 13 months, then super funds wont be able to automatically deduct insurance premiums from your account. Instead, these members will get to “opt-in” rather than “opt-out” of paying for insurance.
We’ve always believed that super funds shouldn’t charge you for insurance you haven’t asked for. Future Super has always had opt-in life insurance. We’ve created an easy process to opt-in to paying for insurance if you want it, but the choice is yours.
4. Exit fees are on the way out
The proposed changes would also ban super funds from charging exit fees when their members leave their fund. This is a great development. Super funds should be encouraging their members to make active decisions about their super, not slugging them with an exit fee if they choose to leave to a fund that better suits their needs or their values.
Future Super does not charge exit fees.
5. Super consolidation
It is proposed that the Australian Tax Office be given increased powers to automatically consolidate inactive super accounts that have a balance below $6000. We believe this could lead to super funds engaging better with their members, or potentially engaging with their members for the first time.
If a super fund wants to keep a member, they will need to put in more effort to ensure that members with a low balance remain active. This means contacting the member to help them consolidate old accounts, helping them to make personal contributions, and helping to ensure that their employer is paying their super contributions to their account.
Any change that has the effect of increasing engagement of Australians with their super fund is a positive.