Click on pretty much any article about superannuation and you’ll see five common mistakes that keep coming up over and over again - and yet, we’re all apparently failing to take heed.
The key to ensuring your retirement savings are on track almost always comes back to the “five Cs”: choose wisely, consolidate, contribute, check insurance, continue.
Getting these steps right is essential, because they will help you understand what’s going on. Super isn’t just money that accumulates as you make contributions. With the right choices, it will grow into a healthy nest-egg that will help you live your best life long after you hang up the work boots.
It’s not as confusing as you think. Here is a handy guide to the most common mistakes people make, and how to avoid them.
There are three main types of superannuation funds - retail, industry and self-managed - but most people fall into one of the first two categories.
Retail funds are generally run by banks and insurance companies. They are designed to generate a profit, which is returned as dividends to its shareholders. Meanwhile, industry funds are run by employer and employee organisations. They are run only to benefit their members.
A very common mistake is not electing a super account. Most employers have a default super option, and if you change jobs a few times without electing your own fund, it’s possible that each employer will have started a new account in your name. Multiple accounts means multiple fees. Remember that you’re within your rights to ask all of your employers to pay super into the same account.
When choosing a super fund, ASIC’s MoneySmart website suggests looking out for low fees, investment options you’re comfortable with, good performance over five years, and suitable insurance cover.
The next common mistake is not knowing where your superannuation is saved. Data from the Australian Tax Office (ATO), published in October 2018, suggests there is still about $17.5 million worth of lost and unclaimed superannuation waiting to be found.
According to assistant commissioner Graham Whyte, some people have lost huge amounts of money - including a single account in New South Wales that holds more than $2.2 million. Just imagine that for a second. When this person consolidates their super, it will be kind of like winning the lottery.
However, many of us still hold multiple accounts when we should be consolidating them into one.
The ATO offers data on the amounts of lost and unclaimed super by postcode. These 10 postcodes have Australia’s largest amounts of lost and unclaimed super:
- 4740 - Mackay and surrounds | State: QLD | Total number of accounts: 12,140 | Total value: $60,172,250
- 2170 - Liverpool and surrounds | State: NSW | Total number of accounts: 13,236 | Total value: $59,152,322
- 4870 - Cairns and surrounds | State: QLD | Total number of accounts: 15,450 | Total value: $57,463,430
- 3030 - Werribee and surrounds | State: VIC | Total number of accounts: 10,457 | Total value: $56,665,113
- 4350 - Toowoomba and surrounds | State: QLD | Total number of accounts : 13,425 | Total value: $53,259,353
- 2560 - Campbelltown and surrounds | State: NSW | Total number of accounts: 11,310 | Total value: $50,193,212
- 2010 - Surry Hills and Darlinghurst | State: NSW | Total number of accounts: 7,646 | Total value: $45,659,021
- 2000 - Sydney CBD | State: NSW | Total number of accounts: 6,520 | Total value: $44,048,306
- 6210 - Mandurah and surrounds | State: WA | Total number of accounts: 10,983 | Total value: $43,997,603
- 3029 - Hoppers Crossing and surrounds | State: VIC | Total number of accounts: 9,926 | Total value: $43,761,841
See the ATO's full breakdown of lost super here.
The best way to help your super grow is to make regular contributions. Your employer is required by law to deposit a percentage of your income directly into your account, but you can also make contributions on top of the minimum amount by sacrificing part of your salary. There are a lot of advantages to this.
A key mistake is not taking advantage of tax breaks available through superannuation. For example, if you salary-sacrifice, the money will come from your pre-tax income straight into your super fund, where it will be effectively taxed at 15 per cent. This generates a valuable tax saving for most people, since most employees have a marginal tax rate of at least 32.5 per cent.
Directing part of your pre-tax salary into your super is a smart way to maximise your savings.
At the other end of that spectrum, another common mistake is not being aware of the type of insurance your fund offers and the rules around when it does and doesn’t apply.
For example, Will Barsby, a superannuation law expert at Shine Lawyers, says the income protection attached to most super funds is great, but it may not apply if your balance drops below a certain level.
“Probably the number one thing we see is a lack of regular contributions,” he says.
“If you take a break from work or you go travelling or on parenting leave and let the balance drop, the insurance drops. The easiest thing to do is get on the phone to your super fund and make sure you have active insurance in place. Make sure you have the right level to protect your time. People get letters from their super funds all the time, it’s important to read them and understand them."
The final common mistake people make with superannuation is sorting it out and then forgetting about it. Once you’re on the path for success, keep doing what you’re doing. Start as soon as you can, save as much as you can for as long as you can - even once you reach retirement.
American business magnate Warren Buffett, who is worth some USD $83.4 billion (AUD $116.5 billion) has described compound interest as being the “eighth wonder of the world”. Pay attention, keep making good choices, and let it do its thing.
This article was first published by the Herald Sun on 15 April 2019. The information referred to may change from the date of publication and care should be taken when relying on such information.