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Think the superannuation guarantee is enough or that consolidation is always the way to go? Read on and learn the truth about these and other popular notions.
More and more Aussies have started taking a greater interest in their super. They’re learning about how the system works and what they can do to take control of their money. Despite this, there are still misconceptions floating around. We’ve separated fact from fiction to debunk seven common super myths.
1. If you don’t work, you can’t contribute to super
You don’t have to be working to add money to your super fund if you’re under 67. (A work test currently applies if you’re between 67 and 74 but this may change.) There are several reasons why making voluntary contributions may be a good idea.
“Keeping your super on track is important, even when you may not be working,” said Jen Harding, General Manager – Advice Development and Growth, at HESTA.
“For example, when our members take time off to care for others, whether it’s children or parents, we encourage them to look at options to continue growing their super. After all, it’s these breaks in employment that contribute to the gender gap in super balances at retirement.”
One option is to make regular personal contributions into your super straight from your bank account. If you’re not working and not making any money, the government may even top up your contributions.
“Another option is for your spouse to make a contribution into your super on your behalf,” Ms Harding said.
If you are adding money to your super, it’s important to check any contribution limits, she added.
If you stop making contributions to your fund, your insurance may be cancelled.
“Under the law, super funds will cancel insurance on inactive super accounts that haven’t received contributions for at least 16 months,” Moneysmart pointed out.
“Your super fund will contact you if your insurance is about to end. If you want to keep your insurance, you’ll need to tell your super fund or contribute to that super account.”
2. Salary sacrificing is worthwhile only if you are on a high income
Salary sacrificing means having part of your before-tax salary paid into your super, rather than your bank account.
One of the advantages of salary sacrificing is that your contributions are taxed at 15%, rather than your marginal tax rate. Essentially, what this means is that as long as your personal tax rate is higher than 15%, you will probably benefit from salary sacrificing money into super.
It’s easy to assume the benefit will be much bigger for someone in a higher tax bracket but that’s not necessarily the case. H&R Block crunched the numbers, comparing someone earning $30,000 to someone with a gross salary of $200,000 when both opt to salary sacrifice $1,000 a year into super.
The person on $200,000 saves $450 but the person earning $30,000 is not far behind. After taking into account the Low Income Super Tax Offset, the lower earner saves $340.
It’s a good idea to get independent advice to help you work out what is right for you.
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3. Performance is the most important consideration when comparing funds
Canstar Group Executive, Financial Services & Chief Commentator, Steve Mickenbecker, described this as a “half-myth”.
“Your objective with superannuation is to reach a level of savings sufficient to support your desired lifestyle in your retirement years. Choosing a fund that delivers a strong investment return and sustains that performance over your lifetime in the fund is critical to achieving that goal,” Mr Mickenbecker explained.
“The piece that is missing here, however, is that it has to be performance net of fees. Paying too much in fees puts a huge dent in retirement savings.”
So, yes, think about how a fund has performed over the long term, but there is more to consider. You should also look at the fees, the investment options you can choose from, the insurance on offer and any extra services available.
4. Your employer makes contributions to super so you don’t have to add your own
Sure, it’s great that your employer adds money to your super but there’s a good chance you won’t reach your goal with these contributions alone.
“The Superannuation Guarantee [SG] – the amount your employer is obliged to pay into your fund – is an important ingredient to help you achieve a comfortable retirement,” explained Group Executive – Advice Network for Aware Super, Sarah Forman.
“But even with the planned superannuation guarantee increases over the coming few years, many Australians will still struggle to save enough superannuation to avoid needing to rely on the full or part age pension. The age pension is currently less than $70 per day, which may not provide for the retirement lifestyle many people aspire to.
“According to the Association of Superannuation Funds of Australia [ASFA], a couple now needs a super balance of $640,000, and a single person needs $545,000, for a comfortable retirement. Only about 25% of [people] are retiring with that sort of balance at the moment.”
So, relying purely on the SG may not be a good idea.
“If you are able to top up your super with a little more, particularly in your younger years, that can make a huge difference to your financial future,” Ms Forman said.
“This is particularly important for women, who often spend several years out of the workforce caring for family, and often don’t receive any superannuation guarantee contributions during this time. The knock-on effects for their long-term financial future can be significant,” she added.
→ Related: How much super should I have at my age?
5. Consolidating super funds is always a good idea, as you save on fees
There’s no denying that consolidating funds will help you reduce the fees you are paying. It can also make it easier for you to keep track of your fund and means less paperwork – but it’s not the right answer for everyone.
“Consolidating multiple super accounts makes sense for many people. However, some people choose to hold more than one super account to boost their insurance coverage or diversify their investments across funds,” ASFA CEO Dr Martin Fahy, told Canstar.
“There’s no one-size-fits-all solution when it comes to super. ASFA recommends talking to your super fund about what’s right for your individual needs.”
The insurance you have through your super fund is something you should consider carefully before leaving.
“If you change funds, you might not be able to get the same cover. Be particularly careful if you have a pre-existing medical condition or are aged 60 or over,” Moneysmart warned.
Compare Superannuation with Canstar
The table below displays some of the superannuation funds currently available on Canstar’s database for Australians aged 30 to 39 with a super balance of up to $55,000. The results shown are sorted by Star Rating (highest to lowest) and then alphabetically by provider name. Performance figures shown reflect net investment performance, i.e. net of investment tax, investment management fees and the applicable administration fees based on an account balance of $50,000. To learn more about performance information, click here. Consider the Target Market Determination (TMD) before making a purchase decision. Contact the product issuer directly for a copy of the TMD. Use Canstar’s superannuation comparison selector to view a wider range of super funds. Canstar may earn a fee for referrals.
Fee, performance and asset allocation information shown in the table above have been determined according to the investment profile in the Canstar Superannuation Star Ratings methodology that matches the age group specified above.
6. You are better off with an SMSF
The idea of starting your own super fund may be tempting but it’s not for everyone.
“People can be enticed by the no-investment-fees future of a [self-managed super fund], but investment fees are replaced by accounting and audit fees, which will be prohibitive for any fund with a balance below $300,000 or $400,000,” Canstar’s Mr Mickenbecker said.
“They can fall in love with the concept of managing their own money, but then find their performance languishing behind the professional super fund managers.”
Size matters when it comes to an SMSF. A report prepared by Rice Warner for the SMSF Association in 2020 found that SMSFs need to have at least $200,000 in investments to be cost-competitive with Australian Prudential Regulation Authority funds. It’s not until you have super savings of $500,000 or more that an SMSF is likely to work out cheaper than an industry or retail fund.
SMSFs with larger balances also tend to achieve a better return. For example, Australian Taxation Office (ATO) statistics showed that in 2018/19, funds with a balance of between $50,000 and $100,000 returned -8.1%, on average, while funds with between $500,000 and $1 million in assets returned 6%.
Part of the appeal of an SMSF is that you may be able to use it to buy an investment property but there are strict lending conditions and the rules are quite complex.
“Unless you have a good reason for going SMSF and lots of commitment, you are probably better off on the simpler path,” Mr Mickenbecker said.
7. You have enough insurance through your super
In most cases, your super fund will include a certain level of default life insurance cover but it’s important not to assume it will be adequate for your family’s needs.
“The amount of insurance you have in your super depends on both your super fund and their insurer,” Chief Group Insurance Officer at MetLife Australia, James Carey, explained.
“Insurance inside super is generally cheaper, as the super fund buys policies on behalf of a pool of members, but the cover isn’t going to be tailored to every individual’s changing needs.”
Crunch the numbers for yourself to work out how much cover you need to protect your family. There are online calculators that can help you work out the sum that is right for you.
“The good news is you can also easily change the level and type of insurance you have through your super fund to ensure you have appropriate levels of insurance,” Mr Carey said.
As well as life cover, think about income protection insurance. You may also be able to get this through your super fund. It’s worth noting that you won’t be able to claim a tax deduction for income protection insurance if it is held in your super, though. You may also opt to take out insurance outside of super.
Cover image source: Roman Samborskyi /Shutterstock.com
This content was reviewed by Editor-at-Large Effie Zahos as part of our fact-checking process.
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