Super for young people

Most super funds have been designed for older people with high account balances, not young people who are just starting out in superannuation.

Key points

When you're starting out in superannuation, fees matter more than performance.
Look for percentage fees that are less than 1% pa.
Watch out for funds that charge dollar-based membership fees.
Insurance will cost you more than your regular fees. If you're young and don't need it, think hard before agreeing to buy it.

When you're young and just starting your working life, superannuation and your future retirement will probably be the last thing on your mind. You won't be too worried about your choice of super fund and you'll be quite happy to join the one you're told to join or one with a high profile brand that you like. If you're lucky, this can be a good strategy—you'll join a good value, strongly performing super fund that offers great product features. But not everyone is so lucky. To ensure you get off to a good start in your superannuation life, there's a few things to know:

1. superannuation is compulsory for most people, and it's your money; and

2. a super fund is just a savings account purpose-built to help you save for your retirement.

Fees matter more to young people

Super funds charge fees that are a combination of percentage-based investment and administration fees charged against your account balance and a flat dollar-based member fee.

In 2020, default MySuper products charged an average fee of 1%, made up of 0.15% pa for administration, 0.8% pa for investment management and $78 pa for member fees. Administration and member fees counted together are also called product fees.

But when Rainmaker and people in the superannuation industry talk about fees, they usually mean the fees that apply to people with $50,000 in their account. When you're young and starting out, you won't have $50,000, but probably a few hundred or maybe a thousand dollars.

If this is you, you could be paying actual fees of 10% or more. Even though fees above 3% will now be refunded to you at the end of each year, this means that the money you've paid in these high fees wasn't being invested for you. In any case, why pay high fees if you don't have to? Because of this, young people often pay fees that are about eight times more than the 1% average paid by older people.

Super and Young people:

There are 3.3 million people in Australia aged between 15 and 24 who have 2.8 million superannuation accounts worth $14 billion. But a better way to look at this is that these young people hold 12% of all the member accounts, but only 1% of the money—which is why many super funds don't focus on the needs of their young members. But down the track, you will need to focus on your financial needs, and if your super fund treats you badly now, it will most likely treat you badly when you do have money. Don't cop it, swap funds.

Insurance and the total cost of super

Members who are under age 25 don't have to buy compulsory life insurance through their super fund. Once you are age 25 and over, if you are a member of a MySuper product, you do have to, even though you can choose to opt-out (cancel it) anytime. This life insurance can be a mix of death insurance, total and permanent disability insurance and income protection insurance.

While this insurance is cheap in overall terms, averaging $173 pa for $200,000 cover if you are aged 25, if you have $5,000 in your super account it converts to 3.5% of your account balance. Adding this insurance fee to the regular fees means that you are now paying 6% pa in total fees.

But the scary part is that if you are just starting out and have only about $1,000 in superannuation you could be paying total regular fees and insurance fees equivalent to 25% of your account balance. The chart shows you how this works.

The point we are trying to highlight to young people is that while Australia has a lot of very good super funds that will earn you good investment returns and provide you with great deals on insurance, most of these funds have been designed for older people who have more money in their accounts.

Young people need to look at their superannuation a bit differently.

Signs you're in a good super fund:
  • Trust. You trust the organisation and the people who run the fund and its superannuation products.
  • Performance. The investment options you intend using achieve above-average investment returns over the medium term, e.g., over three or five years.
  • Fees. It charges good value fees around 1% pa or less. If your fund is charging higher fees, you should be getting something special; remember, to earn the fees, your investment returns have to be higher so that you can make back the difference.

Features all good funds should have

Every smart, modern super fund should have a good website with lots of useful easy-to-understand information, online account access, be easy to deal with and most likely have a smartphone app. But this doesn't matter much if you don't trust the fund, or if its performance isn't any good and it's expensive.

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When comparing super funds and considering what is right for you, look for funds displaying the AAA Quality Assessment and Rainmaker SelectingSuper Award logos.

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