Vita Palestrant
Modest savings from part-time work have plenty of time to grow
Many young adults juggle part-time work with different employers while studying, eventually landing up with several inactive default super accounts. The fees in each eat away at the small amounts of money sitting there.
But there’s good news on this front and it will hopefully encourage young adults to focus more enthusiastically on their savings and monitor how their fund is performing.
Last year the federal government introduced a package of reforms entitled Protecting Your Super. Accounts under $6000 that are inactive for over 16 months will be transferred to the tax office for consolidation with the member’s active account; fees on small accounts are now capped at 3% a year; and exit fees, which acted as a disincentive to consolidate, are banned.
And from April 1 this year, life insurance will no longer be automatically given to members under 25. If they want the cover, they will have to opt in, rather than the other way around. Often young members without dependents can do without the insurance – and the premiums.
“The reforms mean young people can’t be charged more than a maximum of 3% a year, but this is still a lot of money,” says Jason Ross, head of superannuation research at Rainmaker, publisher of Money. This means people still need to pay attention to their total annual costs.
While a 1% difference doesn’t sound much, it can have a large impact on your balance over time – up to 20% over 30 years, according to the Australian Securities and Investments Commission. So which default funds are best for young adults?
Money’s 2020 gold award winner for the Best Value Super Fund for Young People is ANZ Smart Choice. The fund earned 9.25% a year over the past three years (on a typical low-balance account of $6000 for someone under 25). Also in the top five were Media Super (8.92%), Equipsuper (8.81%), AustralianSuper (8.82%) and Sunsuper (9.12%).
“Fees are important and investment performance is obviously critically important,” says David Callan, the head of product development and platform strategy at ANZ. “Our fees are some of the lowest in the market.”
Super is a long-term investment, he says, so nurturing it from the beginning is important. “If you are looking at someone in the workforce now, with potentially 40 years of employment ahead of them, the smart things they can do right now will have a significant impact on their future outcomes.”
Tax office data shows people have an average of two to three super accounts.
“If you have three super accounts you are probably paying three sets of admin fees, investment fees and insurance costs. You really want to avoid those multiple sets of fees. Fees can make an enormous difference to your retirement balance.
“Subject to a member providing an explicit consent, we’ll complete a search for them and show them where all their other super is and whether the other accounts have insurance. We’ll advise them about all the things they need to think about if they are consolidating accounts, and that they may lose insurance cover.
“Having the capability, in a digital way, people can gain access to the right information and take action as they see fit and make an appropriate decision.”
Certified financial planner Marisa Broome, principal of Wealthadvice, says the benefits of engaging with super early are enormous. She urges young adults to check their statements carefully and figure out if they are in the right fund or not.
“The truth is that if they think about it at the very beginning when they first start, then at the end of the day they won’t have to think about it all the time because it will be there for them, properly set up.”
She says if you are in the right fund with the right bells and whistles, you’ll end up not having to think about it as life goes on. It will just accumulate there for you.
“Taking a little bit of interest at the beginning will save you so much money on the way through, and it actually does guarantee you a good-quality retirement.”