Superannuation traps that can damage your life savings

As the federal budget nears, superannuation is still the best place for most Australians to build a nest egg, but beware of these wealth-suckers.

Superannuation is in line for some positive news in the coming weeks.

There’s a good chance the federal government will hand out some super sweeteners in its May 9 budget, possibly around super payments for parental leave or measures to stop bosses holding back compulsory employer contributions.

Workers will also benefit from increasing compulsory super contributions from 10.5 to 11 per cent of wages from July 1, on its way to 12 per cent by July 2025.

It’s a nice change from the negativity that was swirling around super a couple of months ago when Treasurer Jim Chalmers unveiled a new tax on people with super balances above $3 million. That sparked claims that people would turn away from super, despite Labor’s plan only affecting a small portion of wealthy Australians.

The new super tax was a warning, though, about the traps that sit quietly inside our super funds just waiting to make an expensive strike on our retirement savings.

Here are five to watch out for.

1. GOVERNMENT TINKERING

Countless rule changes by all governments over the past 30 years have frustrated and confused both experts and savers, but super still remains the best structure for most people to save for retirement.

Labor made a worrying move in February by suggesting Australians’ superannuation wealth was part of a “hive” and “we want to make sure there is plenty of honey to go around”. That alarmed many who though their personal nest eggs might become a government plaything, but any moves in this direction will meet massive resistance.

It pays to keep an eye on the rule changes, and whether they negatively impact your retirement plans.

2. FEES

Paying unnecessary fees to your super fund managers eats into your nest egg, and the losses will compound over time, so it’s wise to check it now.

Investment group Stockspot says anyone paying more than 1.5 per cent in fees to their super fund is “probably being ripped off”.

It says its research found a 35-year-old worker who chooses a fund charging 0.5 per cent rather than 1.5 per cent in fees can be $245,000 better off at retirement.

3. LIFE INSURANCE

Insurance in super is a valuable safety net for families but can also be a two-sided blade cutting into your wealth.

Many Australians are underinsured, which means they are unprotected if death, illness or injury strikes and they cannot afford to cover living expenses, replace income or fund their children’s future.

Others, usually older and richer, waste money paying insurance when their assets elsewhere are more than enough to cover them in a personal disaster. Online calculators to help you check.

4. POOR INVESTMENT MOVES

Super itself is not an investment. It is simply a structure that holds investment assets for retirement, and you generally get to choose what to own, buy and sell.

Some people fail to diversify, or sell out at the bottom of the market rather than ride out the short-term storm, and weaken their wealth for decades to come.

5. IGNORING INCENTIVES

One of the most costly traps is failing to take advantage of the brilliant tax benefits super offers, and the many government incentives available.

Most people can use super to pay zero tax in retirement, while others can get richer faster through co-contributions, spouse contributions, tax deductions for contributions and catch-up contributions. It’s a smorgasbord of savings.

Originally published as Superannuation traps that can damage your life savings