To young people who have just entered the workforce, the prospect of setting aside part of their income for retirement is usually the furthest thing from their minds. After years of financial dependency, they can finally make their own decisions. Buying a reliable vehicle, the latest fashions and electronic devices, socialising with friends and saving for holidays are their current priorities.
It is usually not until they are completing employment forms that they think about superannuation, and often because an employer is asking if they already have a super account. So, what is superannuation and why should young people care about it at this early stage in their working lives?
What is Superannuation?
In simple terms, a superannuation fund is an investment vehicle that receives special tax concessions from the federal government. Members make cash contributions to the fund that is then invested in assets, which generate income to fund retirement. When members finally access this income, the tax concessions they have gained along the way increase the amount of money available to them at retirement.
How Does the Superannuation Guarantee Work?
In Australia, the Superannuation Guarantee (SG) scheme requires an employer to pay a compulsory contribution of 9.5% of an employee’s ordinary time earnings into a super fund. At induction, a new employee signs employment forms including an application to open a superannuation account. Young people without an existing super fund account generally opt to join the one proposed by the employer.
There is nothing wrong with this as many industries have well-established funds, known as industry super funds that have shown consistently reliable performance. These funds are run only for the benefit of members. They have low fees and advertise that they do not pay commissions to financial planners. There are also other “retail” super funds where employees can request their funds be paid.
Take Note of Fees and Charges
All super funds charge their members annual fees. These days, young people move between jobs seeking a career path much more frequently than in previous generations. If they open a new super fund with every employer, their contributions may only amount to a few thousand dollars before they move on to another employer. Having multiple funds will quickly reduce their super balance as their contributions are swallowed up by annual fees and insurance premiums.
Is Consolidation the Best Option?
To prevent this from happening, they can choose one fund and “roll over” the other contributions into this one, consolidating their investment into one account and only paying one set of fees and insurance premiums. They should also do their own investigations into the financial performance of the funds they are considering, the fees charged and any insurance coverage being offered.
How Would You Manage an SMSF?
It is also possible under some circumstances for young people to establish their own self-managed superannuation fund (SMSF), allowing them to have full control over their contributions and investments. This is very time consuming and requires significant knowledge of superannuation processes and tax legislation.
Accounting and business advisory firms, such as Carbon Group, offer administration and compliance support to SMSF managers. Having this assistance is essential for young and inexperienced people who want to manage their own superannuation. By taking control early in their careers, they are giving themselves the best opportunity to think long term and establish a secure financial future.