Young people will be severely disadvantaged if the legislated rises in the superannuation guarantee (SG) do not go ahead.

New research from mProjections has shown that if the SG moves only to the 10 per cent level scheduled for next July, the average 25-year-old will lose $158,078 in their overall balance by 67, the scheduled retirement age.

They will also see retirement income decline 14.8 per cent, or $12,246 a year, to $70,651.

Older people will be hit relatively less than the young because they have fewer working years to go before retirement.

But they will also have significantly less super than younger cohorts because during much of their working lives, the SG was even lower than the current rate of 9.5 per cent of salary.

“There are two standouts from the research,” said Derek Cundell, CEO and founder of mProjections.

“Firstly, younger people will be hardest hit by holding the SG at 10 per cent while those in older cohorts will be less affected.”

“Secondly even without the scheduled SG rises, younger people will be making more in retirement through super than they are making now. And remember their income from super savings will be tax-free.”

mProjections’s research assumes the 25-year-old is currently earning $65,000, the 40-year-old $85,000 and the 55-year-old $105,000.

Another take on that

Industry Super Australia looked at the effects of holding the SG at 9.5 per cent from another angle – that of someone on the median wage.

If the SG rate were to be held at 9.5 per cent, then that would mean  $1495 per year less in super contributions for a 30-year-old on the median wage of $59,800.

At 9.5 per cent, that person would receive SG payments of $5681 a year compared with $7176 at 12 per cent.

Over a working life that would mean $170,000 less in super for someone who stayed on the median wage.

Lifecycle fund trap

Another potential bar to building an adequate super balance is holding your money in a lifecycle fund.

These are funds that move your investments from higher growth assets in younger years to more conservative positions as you age.

Research from Rainmaker Information compared the performance of lifecycle funds with the average single strategy MySuper default fund that leaves you in one asset class regardless of age.

The finding was that a lifecycle fund could see you 23 per cent worse off at age 70, with a balance $170,000 below where it might have been.

However it is not as simple as assuming the averages rule because the performance of lifecycle funds varies far more between funds than that of single strategy funds.

“Lifecycle products can be complex,” said Rainmaker executive director Alex Dunnin.

“There are some very good lifestyle products and some that haven’t come together at all.

“With all the focus coming onto the Your Future Your Super legislation regulators need to start putting scrutiny on lifecycle products as there are a lot of people using them and a lot of money going in.”

The Your Future Your Super legislation will see super funds come under scrutiny for their performance by regulator APRA, with underperformers being banned from accepting new money.

As these charts show there is quite a difference between the performance of lifecycle and standard one strategy funds.

Over a year, the top default earned 7.6 per cent, the top lifecycle for 51- to 60-year-olds earned 5.2 per cent, and the top in the 21-30 category 3.5 per cent.

The single strategy option was the best performer across both one-year and three-year periods. But what concerns Mr Dunnin is the variation among lifecycle funds.

“Lifecycle funds have really big differences in performance between the best and the worst, and that means people who don’t do a lot of research can easily be caught in an underperformer,” Mr Dunnin said.

Whereas the lowest-performing fund in the default category achieved 85 per cent of the 8.1 per cent return achieved by the top performer, it was different for the lifecycle funds.

In the 51- to 60-year-old bracket, the worst performer returned 66 per cent of the top fund and in the 21-to-30 category it was 57 per cent.

“People get worked up about fees but the difference between a high-fee fund and a low-fee fund is 2 per cent versus 0.5 per cent. But if you’ve got a fund returning 10 per cent and another returning 4 per cent that difference is massive in terms of retirement balances,” Mr Dunnin said.

ISA CEO Bernie Dean said all up the figures showed the necessity to boost the SG to 12 per cent by 2025 as legislated rather than a halt, as some Coalition politicians have called for.

“Some federal politicians want to break an election promise and cut super, forcing Australians to work longer or retire with less. It’s time for the government to leave people’s super alone,” Mr Dean said.  

“Rather than getting the legislated super boost, politicians want Australians to sell their family home to fund retirement.”

The New Daily is owned by Industry Super Holdings