$1500 Co-contribution for my children and excessive fees in super funds

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Q. I phoned your Money Matters show last Sunday & asked about investment option for my 14yo daughter who has 2 jobs.

You suggested super, to get the govt incentive. She is not earning enough to pay super yet, though a fund has been set up by employer.If she pays in herself, & gets govt incentive, won’t all that be eaten away by fees as she will not be earning enough from either employer to be paying super for some time yet?

Everything my 19 yo daughter has paid into super (by employers) so far has gone in fees. She actually has a negative balance on her super a/c.

Josie’s Answer: I certainly remember your call and was particularly impressed by your two very hard working kids.

I suggested researching the possibility of taking advantage of the super co-contribution scheme, whereby those earning less than $28,980, are eligible to receive $1500 from the government if they contribute $1,000 of personal contributions into their superannuation account.

There is no minimum age requirement, but they need to working, lodge a tax return and you need to ensure that the money is debited from their own bank account.

With regards to your 14 year old daughter, I am assuming she is earning less than $450 per month and therefore, her employer is under no obligation to pay the 9% superannuation guarantee charge. I can certainly understand your concerns in relation to fees and wish more people would take notice of them.

If you are in the wrong super fund, they can easily strip 20% of your retirement benefit. However, there are member protection rules that apply to funds with 5 or more members.

Basically, if the withdrawal benefit is less than $1,000, the super fund cannot charge fees more than any investment earnings in a year. This rule applies to benefits which arise from the super guarantee. You will need to check your daughter’s super fund to see whether this is in place.

I am very concerned about the fees charged by your 19 year old daughter’s super fund, wherein you state that she has a negative balance and all the super contributions have been eaten away in fees.

From my experience, most super fund charge on average $60-$100 per year admin fee. As a general rule, they also have an investment management fee, however, this is automatically deducted from investment returns. You also need to check whether an adviser is receiving commissions.

Please do not be turned off by the strategy to take advantage of the super co-contribution scheme because of fees. You just need to shop around.

I am the biggest fan of this benefit and it is just too great an opportunity for your children. The reason all this is worth the effort, is that your kids have the benefit of time and compounding which Einstein described as the eighth wonder of the world and it will work its magic by the time your children retire.

Let’s say your 14 year old is able to contribute $1,000, and the Government adds $1,500, $2,500 will be invested. For your information, they can contribute any amount up to $1,000 and the government will match by 150% e.g. $200 member contribution, government will add $300.

Now, let’s assume she was able to take advantage of the full co-contribution for 10 years. By the time she has reached age 60, this $25,000 investment, without adding anything further, would be worth a whopping $2.7M and her total contribution was only $10,000 .

This is assuming that the investment earns 12%pa which is the 50 year historical average return of the Australian share market. In today dollars, it will be worth approximately $950,000, assuming an inflation rate of 3%. Remember, she stopped contributing at age 24!

Before I go here are some more posts from around the web about co-contribution super:

Super co-contribution
Am I Eligible For Super Co-Contribution?
Super Co-Contribution
Using Salary Sacrifice and Super Contribution to Boost Net Worth
Super Rules, OK?
Contribution Rules

Hope I have given you more food for thought and thanks for your fantastic question. I wish you and your family happy money organisation.

Cheers Josie Kay

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