Super in Review: What recent changes mean for younger Australians
Commonwealth Superannuation Corporation’s Manager of Member Education, David Zakharoff, unpacks key recent developments in superannuation impacting younger Australians, including how some changes can be leveraged to boost their balances.
01 Sep 2021
David Zakharoff, CSC’s Manager of Member Education
While the events of 2020 thrust superannuation into the spotlight for younger Australians, the changes introduced since have kept it firmly on the agenda.
Historically, younger demographics have considered the super system too complicated, with 2016 research suggesting nearly one in three Australians aged 29 and under were ‘highly disengaged’ with their superannuation. As a result, super became a service that sat in the background until the end of their working lives, rather than being a service that someone regularly engaged with to ensure it delivered on individual retirement ambitions.
For many in this demographic, the introduction of the Federal Government’s early release of super scheme in 2020 was the first time they’d actively considered their super, and has heralded in a period of unprecedented interest and engagement.
Following this came a number of government reforms which have directly impacted the superannuation of younger Australians, including changes to to the First Home Super Scheme and more recently, new stapling legislation which comes into effect later this year.
To ensure these reforms achieve their desired outcome to boost engagement with superannuation, it’s important younger Australians are educated and informed in a way that encourages them to become actively involved with their super, in order to safeguard their financial futures.
Early Release of Super Scheme and how it impacts compound interest
The Federal Government’s early release of super scheme, introduced in April 2020, allowed eligible individuals who had been financially impacted by COVID-19 to access their super early, with over two million Australians aged 35 or under collectively withdrawing $15.3 billion over the life of the program.
Early release was a temporary measure, but importantly it shone a spotlight on the concept of compound interest, which happens when you earn interest on both the money you’ve saved and the interest you earn.
This concept can be used to illustrate the long-term implications of withdrawing money from your super because it means you could miss out on compound interest, which can potentially reduce the amount of super you’d have in retirement.
If you’re one of those who took advantage of the scheme, it’s wise to consider ways to rebuild your super balance as quickly as possible, by making voluntary contributions such as salary sacrifice and additional personal contributions, so you can begin to accrue compound interest again.
To illustrate the benefits of additional contributions, lets use the example of a young person who puts 1% extra of their earned income into super each year from age 25 - let’s say an additional $37.50 per month. If they did this they could end up with over $58,000 additional in super at age 60.
You can learn more about how compound interest works here.
Super Guarantee increase
A key development that came into effect last month, and one designed to help build super balances over time, was an increase to the Superannuation Guarantee from 9.5 to 10%, with further 0.5% rises to occur incrementally to reach 12% in 2025.
If you’re a Government employee in our PSSap fund, chances are you’re already receiving a 15.4% employer contribution rate, and if you’re in our ADF Super fund you’ll be receiving a 16.4% contribution rate – both well above the 10% that most people now get. However, if you do leave your job in the public service or defence force your employer will most likely contribute 10% of your salary into your super account.
The increase from 9.5 to 12% over the next four years would result in an extra $85,000 in super at retirement for the average Australian worker translates.
On average, people are now living until their mid-to-late 80s and average life expectancy is expected to rise to 90+ by 2050, which means that many of us will spend more than a quarter of our life retired. So while some analysis claims the super guarantee increase may come at a cost to workers’ take-home pay, it’s important to consider the significant benefits of the changes received in retirement - thanks to the power of compound interest.
What’s more, the proposed removal of the minimum wage threshold which is expected to come into effect from 1 July 2022, means more younger Australians will enjoy the benefits of the Super Guarantee, which had previously only applied to workers earning at least $450 a calendar month, before tax.
‘Stapling’ is where a person’s first or existing super fund goes with them when they start a new job, unless they explicity choose to switch to another provider. Stapling is designed to reduce the number of duplicate superannuation accounts that some people hold, which results in the payment of multiple administration fees and insurance premiums.
The stapling reform was part of the Federal Government’s Your Future, Your Super package announced in the 2020-21 Federal Budget, and is considered the biggest shake-up to Australian super since its inception in 1992.
Young Australians, who on average are likely to change careers 5 – 7 times during their working life, stand to benefit the most from this change as they’ll now avoid paying fees and premiums on unwanted duplicate accounts that may have otherwise been opened with each new job.
Regardless of the changes, it’s important young Australians review their super - including any insurance provided through their super - to ensure it suits their individual circumstances.
Beyond the many online resources designed to help you navigate your super, seeking financial advice from a licenced professional is also a great way to effectively assess your options.
The First Home Super Saver Scheme (FHSSS)
Also announced in the 2020-21 Federal Budget was an extension of the FHSSS, which increased the amount of voluntary contributions first homebuyers are allowed to make to their super in order to pay less tax on their savings and then withdraw the funds to purchase their first home.
From 1 July 2022, participants will be able to contribute up to $50,000 - up from $30,000 - with the changes aimed at reducing pressure on housing affordability in Australia.
Make your super work for you
While super can be hard to navigate, recent and ongoing improvements are being made to make it easier to engage with. Given the number of changes being made to the system, including those that directly impact the super balances of younger Australians, now is as good a time as any to assess your options to ensure your super is working for you.
We’re here to help. Learn more about CSC at https://www.csc.gov.au/
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