Paul's Insights: New protection for super
It can be frustrating to have money sitting in super, only to find it gets eaten away by fees and charges over time. It happens all too often. But that's about to change.
From 1 July 2019, the new Protecting Your Super Package (PYSP) will kick in.
As the name suggests, these reforms are designed to protect our super savings from the impact of inappropriate fees and unnecessary insurance premiums.
A key aspect of PYSP is that you’ll pay no exit fee when you switch your super from one fund to another. Exit fees on super have typically been small – averaging less than $70. But it can be a deterrent to switching if you have a small balance.
Also from 1 July, fees on super accounts with balances below $6,000 will be capped at 3% annually. This should help prevent smaller balances being gobbled up by high fees.
Super balances under $6,000 that are inactive (received no contributions for at least 16 months), will be handed over to the Tax Office. That’s not a bad thing. The Tax Office can use your tax file number to merge any dormant accounts with your main super fund helping to reduce the $17.5 billion pool of lost and unclaimed super.
Possibly the most dramatic change of PYSP is the ‘opt in’ arrangements for life insurance.
If you have an inactive account, your super fund should be in touch to let you know that any life cover you have through the fund is about to end.
It’s a step in the right direction because you could be paying for default life insurance without even realising it. Yet the premiums can steadily whittle away your super savings especially if there are no contributions coming in.
You can opt to keep life cover in place though young people could be paying for a product they may not need or want.
If you have a family or high personal debts, life cover through super makes sense. However, if you’re in your early 20s or 30s, single and without any major financial commitments, you probably don’t need life insurance at this point.
Our investment watchdog – ASIC, is warning super funds not to encourage members to hang onto inactive funds or maintain insurance in funds that aren’t their main account.
Yes, it’s another fine-tweaking of our super system but these reforms should help a greater number of Australians retire with more in the future.
Paul Clitheroe is Chairman of InvestSMART, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.