It might seem a bit early to be thinking about your child's retirement as they start their teen years, but this life stage is in reality a great time to start with a super strategy. Starting a decade earlier could help your teen build a stable financial foundation, but you’ll want to watch out for a common pitfall: low balances being eroded by account fees. Here we’ll look at how to protect your teen's super from excessive super fund fees.
The importance of super for students
Getting started early in super could give your teen a significant head start in building financial stability. The Age Pension, if your child is eventually eligible for it, might not guarantee a comfortable living standard. Additionally, your teen could be living well beyond 20 years and up to 40 years or more in retirement, so will they be able to support themselves when they're no longer generating an income from work?
Super comes with tax benefits, government incentives and bonuses, such as co-contributions and even a house-purchase scheme
. The earlier you start, the more you can take advantage of compound interest, since you have a longer investment time frame. And with the significant tax benefits, you could have more money working harder for you before retirement.
The lost decade for super and the zigzag death
Younger people can be more likely to be disconnected and unfocused on their super. They might only start taking interest years after they enter the workforce, near the end of their twenties, when they could’ve gotten serious about their superannuation a decade earlier. They might have a “lost decade of super” that could look something like this: high fees eroding low super balances, paying unnecessary premiums for inappropriate life insurance, duplicate accounts, and lost super.
In contrast, the lost decade could easily look very different. Your teen could choose an appropriate low-fee account, make voluntary contributions
, and take advantage of government incentives. The result could be relatively low contributions resulting in an impressive super balance, because the super is left to compound for a decent time frame.
Another thing to be wary of is the “zigzag of death
” which could easily happen when your teen starts a summer job and leaves it up to their boss to choose their super fund. They earn a couple of hundred dollars by the end of their job, and then the super fund charges hefty fees, eventually eroding the balance to zero. Your teen starts another job and the new employer deposits money into another fund. Multiple accounts means extra fees, which further works to erode your child's super. Add automatic life insurance costs - which your teen might not even have known about - and the zag back down to zero is hastened.
Avoiding the mistake of eroding low-balance accounts
Your teen's super account(s) could offer life insurance by default, so unless you opt out, you could be charged insurance premiums. Like your own super account, your teen's super account is probably charged for administration and investment management. The administration fee covers the cost of operating the fund and maintaining the super account, while investment management fees are charged for the service associated with managing the money. Other fees could include switching, fees, exit fees, and advice fees.
1. Switch to a low-fee fund
So to avoid the common pitfall of low-balance accounts eroded to nothing, check the super fund's terms and conditions and understand what's being charged in fees. Consider if you really need life insurance.
If it's a high fee fund, consider switching to a fund that charges low fees
. You can find a fund that's geared towards the needs of young people and teens. These funds might offer no-fee accounts or discounted fees for low balances.
Additionally, if your child changes jobs, consolidating your teen's super into a single low-fee account could help your child save on paying multiple sets of fees or losing track of their super. Find any lost super and maintain only one account to avoid paying fees for multiple accounts
3. Check insurance cover
Insurance premiums through super can be a major expense, especially for low-balance accounts. Your teen might be able to opt for a level of insurance cover suitable for their life stage, or they could opt out of insurance altogether if you think it's not necessary.
While retirement seems far offer at this stage, your child's teen years could help them avoid the “lost decade” of super and the zigzag of death for low-balance accounts. Guide them to find the right fund and account for their super needs, and make sure they consolidate multiple accounts to save on fees. By avoiding hefty fees and unnecessary features, you could help your teen kids get a head start on super by having their money working harder for longer.