Impact of insurance on super savings may be overstated
Research finds the opt-in insurance model would only increase retirement savings by $1,400 over your working life.
While most Aussies saw the recent "Protecting your Super Package" reforms from the Federal government as a win, life insurer AIA says that these changes will leave "1.4 million young people under 25 without much needed financial protections."
In case you missed it, back in May 2018, Treasurer Scott Morrison announced the government would be making some changes to superannuation. Along with banning super funds from charging exit fees and excessive fees on super accounts with balances lower than $6,000, the treasurer announced that the default insurances from super funds would now operate on an opt-in basis for those with low balances and for those under the age of 25.
In response, AIA commissioned Rice Warner to look into how an opt-in insurance model would affect the retirement savings of someone under 25. The research revealed that the additional savings would be negligible, with the average individual being just $1,400 (0.27%) better off over their working life.
“This data raises legitimate questions as to the value of such reforms, where members will forgo valuable protections for a minimal financial gain in retirement. The cost savings are inadequate when considering the increased health and financial risks for under 25s," AIA Australia and New Zealand CEO Damien Mu said in a statement.
Is there a better solution?
According to AIA, the main threat to retirement balances comes in the form of duplicate accounts and not insurance, as evidenced by The Productivity Commission’s recent Superannuation: Assessing Efficiency and Competitiveness draft report, which labelled "duplicate accounts as a core driver of balance erosion and estimated that the annual cost of excess insurance premiums for members was $1.9 billion each year."
“By adopting new measures on inactive accounts, the government will achieve two-thirds of its targeted cost savings for members, while addressing the important issue of duplicate accounts. This is what the government should be focused on, removing cover only in instances where insurance is not required,” Mu said.
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