New rules put squeeze on spending

Compulsory superannuation contributions will increase gradually over the next eight years to 12 per cent. This is a good thing for our retirement savings but it might increase pressure on younger Australians.

Compulsory superannuation contributions will increase gradually over the next eight years to 12 per cent. This is a good thing for our retirement savings but it might increase pressure on younger Australians.

Is it true, as reported in the press this week, that the 3 per cent increase in compulsory super contributions from 9 per cent to 12 per cent will increase the financial pressure on younger Australians? If so, what can we do now and in the future to lessen the burden on our family?

Research published by the University of NSW's Dr Bruce Bradbury indicates that diverting an additional 3 per cent of earnings to super will reduce the money available to fund more immediate needs, including achieving home ownership and educating children.

Can you provide more details?

The super preservation rules mean that for most people under 50, super assets can't be touched except in circumstances of extreme financial hardship until age 60. The government's argument is that all Australians need to put more into super to fund an adequate retirement.

Wouldn't we be better off having more money to service our mortgage and pay off the loan more quickly?

I can't provide a definite answer to this. The global financial crisis has taken a lot of the gloss off super, providing only low earnings compared with paying off a mortgage over the past five years. With the problems in Europe and elsewhere, it's also difficult to see a quick recovery. It's a pity the decision to force more money into super has been taken when future returns are likely to be volatile.

So have you any suggestions on how we can protect our standard of living and maintain our future cash flow?

There are several issues you can consider now that could help. The first is to reduce, or even stop, any voluntary contributions you now make into super. The money gained from this can be applied to reducing the mortgage and allow you room to lower repayments in future if necessary. It would also help if you used the savings from recent interest-rate reductions to reduce loan repayments.

Our financial situation is really tight and we're not making any voluntary super contributions. Have you any other ideas?

Yes. Over the years, I've been surprised by the high level of insurance premiums paid by many families out of their take-home pay. This includes payments for, in many cases, costly mortgage insurance and personal life and income-protection policies. It's essential for families, especially those with children, to have comprehensive death, disability and income-protection coverage. However, what many people don't know, or aren't told, is that this coverage can be obtained at competitive costs within their work or personal superannuation funds. Industry super funds, for example, generally offer highly attractive coverage compared with what individuals can obtain personally.

Are you suggesting we consider dropping our personal insurance coverage, including our mortgage insurance?

I'm only outlining general options that warrant consideration. With insurance, the crucial point is to obtain replacement coverage first before cancelling any existing policy. This ensures you will always be protected. The major motivation for moving as much of your personal coverage as possible into your super fund is that the premiums will be paid automatically by your employer's compulsory super contributions. Your personal cash flow will be increased when you're able to terminate your personal policies that are paid from your after-tax income.

Won't this reduce the future growth of our super fund?

Yes it will but provided you save the money gained from reducing your personal insurance outlays, you could end up being better off with a lower mortgage compensating for the super level. There will be time to boost your super contributions closer to retirement.

comments@dixon.com.au

Daryl Dixon is the executive chairman of

Dixon Advisory.

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