The 2018-19 federal budget, announced on 8 May, seeks to protect Australians’ superannuation savings from ‘undue erosion by fees and insurance premiums’. The move could save those aged below 25 up to A$522 ($377) per year, said the financial comparison site, Canstar.
The changes proposed in the budget address include:
- A requirement of superannuation funds to offer only insurance on an opt-in basis in relation to accounts:
- that have balances below A$6,000;
- of new members who are under 25 years old; or
- that have not received a contribution for 13 months or longer.
- A 3% annual cap on administration and investment fees charged on superannuation accounts with balances of A$6,000 or less will be applied.
- Exit fees on any superannuation accounts will be banned.
- The Australian Taxation Office will be in charge of consolidating inactive super accounts with balances of less than A$6,000 and transferring those funds to member’s current accounts where possible.
Canstar found that around 60% of superannuation funds on its database had default life insurance, with some funds automatically charging a 25-year-old for over A$300,000 in death cover and over A$500,000 in total and permanent disability insurance.
Canstar general manager of wealth Josh Callaghan said, “When thinking of life insurance coverage we typically consider how much would be required to clear large debts, such as home loans, and provide for the surviving family to ensure they are not forced into a desperate situation.”
Canstar found the top default insurance premium paid by a person aged under 25 on its database was A$522 per annum for A$200,000 in death cover and A$60,000 in TPD insurance.
Mr Callaghan said the cost of insurance on a low superannuation balance puts a significant performance hurdle in front of people.
However, the Association of Superannuation Funds of Australia (ASFA) said that requiring young people to opt for insurance will have a significant impact, particularly on those in high risk occupations and raises the potential for a number of unintended consequences. Behavioural economics indicates that only a very small minority of young people will opt-in, in all likelihood much less than 10%.
“Insurance in superannuation is one of the most cost- and tax-effective options to provide protection, particularly for the young and low income earners,” said ASFA CEO Dr Martin Fahy.
“Many young people have dependants and financial commitments so in the instance of a tragic event occurring, particularly disablement early in life, having insurance in place is extremely valuable. Moving to an opt-in model puts insurance coverage at risk for this segment.” A