Let’s be honest -- superannuation isn’t the most exciting topic out there, so trying to explain the concept to a busy teenager can be a challenge. If you're not sure where to begin, check out our jargon buster for everything you need to know about explaining super to teens.
Start with the basics
Start by explaining the basics, including the hows and whys of superannuation.
- Definition - Super is a type of long term savings for retirement. 11% of your pay is transferred into your super account. This is directed into a pool with other members' money and invested by professional investment managers.
- Access - You can usually only access super after a certain age, when you retire. The current rules say those born after 1 July 1964 can start accessing their super at age 60. This can be as a lump sum, regular income stream, or both.
- Contributions - You can also top up your super with your own money. This is known as making contributions.
- Super is invested - Once money is paid into your teenager's super fund, they start earning investment returns on it. The super fund is in charge of investing members' money.
Explaining contributions
Explain the different types of super contributions to your teen.
- Employer - If your teen is 18 years of age or older, their employer is generally obligated to pay 11% of their ordinary time earnings into their chosen super fund account. This is called the Superannuation Guarantee contribution, but might also be known more generically as an employer contribution. If your teen is under 18, typically they’ll be eligible for employer contributions if they work more than 30 hours a week. Your teen can see how much super they’re paid by checking their pay slip.
- Personal – Your teen can make extra contributions to their super account. Personal contributions can be pre-tax (i.e. salary sacrifice) or after-tax via a voluntary contribution from your bank account. As a parent you can also help your teen get a head start by transferring money into their account.
- Government – If your teen makes or receives personal contributions into their super account, the government might match this amount to a prescribed limit. This is known as a government co-contribution and it’s designed to encourage people to put away more money for retirement.
Types of super funds
The key types are retail, industry, public sector, and corporate funds.
- Retail - Retail funds are open to anyone, they offer numerous investment options, and they're usually run by investment companies or banks.
- Industry - Industry funds might be open to anyone or only people in an industry. They tend to have fewer investment options and are not for profit.
- Public sector - These funds are usually for government employees only.
- Corporate - Corporate funds are usually for employees of a specific company.
- Self-managed super fund - You can establish and maintain your own fund with a self-managed super fund.
Understanding the jargon
Your teenager might ask you about common terms like ‘accumulation’ and ‘defined benefit funds’. This quick jargon buster explains what they mean.
- Accumulation funds - Most Aussies have their super in an accumulation fund. The value of your benefits on retirement is largely dependent on how much is contributed by you and on your behalf, and how well your investment performs.
- Defined benefits funds - Less common than accumulation funds, the value of your benefits on retirement is based on contributions, investment performance, and things like years of service with the company and/or your salary at the time of your retirement.
- MySuper account - This is the common default account type in many super funds. This type of account typically offers, basic features, simple investment options, and automatic life insurance. It's available only in accumulation funds.
- Preservation age - This is the age you can start accessing your super.
- Salary sacrifice - This is where you agree with your employer to pay some of your pre-tax pay straight into your super fund account as a voluntary contribution.
- Investment strategy – This is how your super is invested. Generally, you can choose to have your super invested in categories like balanced, growth, or conservative, which reflect different risk levels and growth potentials.
Choosing a fund
Along with features - like investment options, service, and extra benefits - fees are an important consideration when choosing a super fund. For teens, choosing a fund with low fees is particularly important if they have a low balance. These fees can include administration, investment, indirect, advice, switching, transaction, insurance premium, exit, and activity-based fees. Ask for fee examples from your fund to make it easier to understand how fees could impact your teenager's super balance. Thoroughly review the product disclosure statement to understand fees, investment options, benefits and risk.
The future is now
So superannuation isn't as complex as it might appear, and you could certainly help your teen better understand it. Your teenager should understand the basics, along with how contributions are made and how to choose the right type of fund. If you take the time to explain the basics and terminology to your teen, they could come away with a better appreciation of how super could help them build wealth and security for the long term.
At Student Super, we believe that helping your child get set up now will benefit them in the future. If you need more assistance with how to help your child’s super, get in touch with our friendly team today.
