Uptake of the superannuation co-contributions scheme has fallen dramatically as people worry about putting extra money into their super. The co-contribution scheme is where for each dollar put into superannuation, the government puts in a matching dollar.
That's an immediate, guaranteed investment return of 100 per cent.
Data released by the Prudential Regulation Authority shows co-contributions and spouse contributions were $865 million for the June 2011 financial year compared to $1.34 billion for the year earlier. The figures are not given for each of the co-contribution and spouse contributions but it is likely that co-contribution is the much larger component.
Although it is a dollar-for-dollar match, the maximum that can be contributed is $1000 during the financial year. It's a matching dollar for incomes up to $31,920, after which the government's contribution reduces to zero at incomes of $61,920.
Co-contributions are very easy to organise through the super fund. The tax office assesses whether the fund member is eligible for a super co-contribution from the information supplied by the super fund and the fund member's tax return. The government co-contribution is paid into the member's super account after the end of the financial year.
While the most likely reason for the fall in co-contributions is the poor performances of investments markets, fund members may also be responding to the lowering of the government's contribution from $1.50 to $1. The reduction to $1 started in the financial year beginning in July 1, 2009. Reporting on the scheme's uptake is slow because the government's co-contribution is paid after June 30 for personal contributions made in the previous 12 months. Also from July 1, 2009, the upper income thresholds have not been indexed to keep pace with inflation. That means fewer people are eligible for the co-contribution.
As Deborah Wixted, the head of technical services at Colonial First State Investments, points out a further change was that from July 1, 2009, the government changed the definition of "income" for the thresholds used for the co-contribution to include income salary sacrificed. Prior to that time, income that was salary sacrificed was not included.
It is also likely that many lower- and middle-income families are feeling the squeeze on their finances through price rises of essential items. Any "extra" money may be going towards the mortgage or paying off credit card debt.
But these factors are not likely to be enough, on their own, to fully explain the drop in uptake. While many investors probably thought the worst of the GFC was behind us in late 2009, the continuing volatility of investment markets has made investors realise that there are not going to be any quick fixes to the problems affecting large parts of the developed world. Investors are cautious for good reason, given the poor health of the US and many European economies. Investors are expecting very low global economic growth, which will constrain companies' profit growth and share-price growth.
But fund members can always elect to have their super contributions go into their fund's cash option rather than into investment options with big exposures to shares. By parking the co-contributions in the cash option, they can take advantage of the scheme while not risking their capital. When confidence in markets returns they can switch into an investment option with exposure to growth assets.
The real power of the co-contribution scheme is for those younger fund members who are working part-time while they study or have just entered the full-time workforce. The national technical manager at ANZ's wealth management arm, OnePath, Graeme Colley, says that $1000 worth of contributions at age 20 could be worth 40 times that at retirement.
The other group is older women, many of whom do not have much super and broken work patterns. Big industry super funds with large numbers of women such as the health and community care industry fund, Hesta, have about one in 10 of their members participating in the co-contribution scheme. While the funds do a good job of promoting the scheme to their members, the government could do more to advertise the scheme's benefits.
Frequently Asked Questions about this Article…
What is the superannuation co-contribution scheme and how does the government match my contribution?
The superannuation co-contribution scheme is a government program that puts a matching dollar into your super for each dollar you contribute personally. The match is dollar-for-dollar up to a maximum government payment of $1,000 in a financial year. The full match applies for incomes up to $31,920 and the government contribution reduces to zero at incomes of $61,920. The co-contribution is assessed and paid into your super account after the end of the financial year.
Why has uptake of the government co-contribution scheme fallen?
Uptake has fallen for several reasons noted in the article: poor investment market performance, a reduction in the government’s matching rate (from $1.50 to $1 beginning in the 2009–10 year), income thresholds that have not been indexed for inflation, and a change to include salary‑sacrificed income in the eligibility test. Cost-of-living pressures and ongoing global economic uncertainty have also made many people cautious about putting extra money into super.
How big was the drop in co-contributions between the two years mentioned?
Data from the Prudential Regulation Authority showed co-contributions and spouse contributions were $865 million for the June 2011 financial year compared with $1.34 billion the year earlier, indicating a substantial fall in take-up.
How do I know if I’m eligible for the super co-contribution (co-contribution eligibility)?
Eligibility is assessed by the tax office using information supplied by your super fund and your tax return. Key factors in eligibility mentioned in the article are your income (full match up to $31,920, phasing out to zero at $61,920) and that, since July 1, 2009, salary‑sacrificed income is included in the income definition used for the thresholds.
How do I claim or receive the government co-contribution?
You don’t need to apply separately. You arrange personal contributions through your super fund, and the tax office assesses eligibility after the financial year using your tax return and details from the fund. The government co-contribution is then paid into your super account after June 30 for contributions made in the previous 12 months.
Can I avoid investment market risk when accepting a co-contribution?
Yes. Many super funds allow members to elect that personal contributions (including co-contributions) go into the fund’s cash option rather than growth options with high share exposure. By parking the co-contribution in cash, you can get the government match while limiting short‑term market risk and later switch into growth options when you feel comfortable.
Who benefits most from the super co-contribution scheme?
The article highlights two key groups: younger members (for example, part‑time students or people entering the workforce) where a small contribution early can compound a long time—ANZ/OnePath’s Graeme Colley quoted that $1,000 at age 20 could be worth about 40 times at retirement—and older women with broken work patterns who often have lower super balances. Industry funds such as Hesta promote the scheme to these members.
Could more be done to boost co-contribution take-up?
According to the article, funds do a good job promoting the scheme to members, but the government could do more to advertise its benefits. Structural issues such as non‑indexed income thresholds and the changed definition of income also limit eligibility, which contributes to lower take‑up.
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