5 questions you should always ask before you open a new super account
Selecting the right superannuation fund can sometimes seem like a difficult task. But when you consider that your super may ultimately have to sustain your lifestyle for more than 35 years, it's vital that you sort the wheat from the chaff.
So if you're struggling to choose a super fund, we've listed five simple things we think you need to consider. And to help you on your journey, we've also included a glossary of commonly used terms at the end of this article.
1. What are your retirement goals?
Most people say they want a 'comfortable' retirement. But what exactly does that mean? According to the government's MoneySmart website, the average Australian couple needs $59,971 per annum for a comfortable retirement if they stop working at 65 and live until 85. For an individual it's $43,665.
Based on these figures, a couple retiring today would need a joint balance of $640,000 to sustain a comfortable life and an individual would need $545,000.
Australia's ageing population means that qualifying for the pension may become increasingly difficult, so it's likely younger Australians will need to save considerably more.
That means it's vital to get your super working hard for you as soon as you can. And that leaves open the question of whether you should be making additional contributions to your super. After all, you can make concessional contributions of up to $25,000 a year to your super, as well as non-concessional contributions of up to $100,000 a year.
But because any contributions you make - whether on your own or from your employer - will probably be classed as preserved benefits there are strict rules around when you'll be able to access those funds. So you should always make sure you're unlikely to need any of the money you're put into your super until you stop working. You can find out whether your funds are preserved benefits on your super statement.
Your super statement will also show which parts of your super are taxable components and which are tax-free.
2. How much control do you want over day-to-day investment decisions?
To really answer this question, you also need to work out the types of assets you want your super money invested in. And this should depend on a number of factors including your age and your appetite for risk.
Many people who want greater control over day-to-day investment decisions are setting up their own self managed super fund (SMSF). However, David Barrett, Head of Macquarie Technical Services (Macquarie's technical specialist team) doesn't believe you need to go quite this far just to have a direct say in where your super is invested.
He suggests an alternative may be a Master Trust or Wrap-style superannuation fund. Both allow you to 'wrap' your super into a portfolio of investments, including wholesale funds you usually wouldn't have access to as an individual investor. A wrap also lets you invest directly in shares.
"Unless you specifically want the option of investing in property or non-alternative assets such as art or antiques, the level of control these funds offer is comparable to an SMSF, without the need to be involved in setting up and administering an SMSF."
Many investors, however, are comfortable letting professional investors make investment decisions on their behalf via managed funds. These allow many people to pool their money together and the investment manager then buys or sells shares on everyone's behalf.
Barrett says there is now a wide range of retail super funds (funds owned by financial institutions or insurers), which will let investors choose from managed funds that cover different markets, industries and investment strategies.
There is also the option of an industry super fund, which provides some limited investment choice – usually between five and 15 managed funds – usually at low cost.
3. What's the most cost-effective way of achieving your goals?
Most superannuation fees are calculated as a percentage of your total balance. So the more you have invested, the more you'll pay in fees.
The average superannuation fund charges total fees of 1.12 per cent of assets managed. In other words, if your super balance is $50,000 you'd expect to pay an average of $600 in fees per year.
Generally, retail funds will charge higher fees than industry funds - the average retail personal superannuation fund charges a total of 1.72 per cent, compared to 1.07 per cent for industry super funds. But they also often provide greater choice and are more actively managed (meaning the investment manager makes more frequent decisions about what and when to buy and sell).
You can find each of the fees a super fund charges in the Product Disclosure Statement (PDS). However, they will usually include:
- an administration fee which covers the cost of administrative tasks such as sending statements
- an adviser service fee for any personal advice about your investments
- a management fee or asset management fee which covers the cost of managing your investments
- contribution fees to cover the fund's cost of receiving and investing your super contributions.
And you can review exactly how much each of these cost you each year in your super statement.
Meanwhile, if you're considering setting up your own SMSF, you'll need to factor in establishment costs, running costs (including an annual audit and lodgement fee) and potentially an advice fee.
Barrett points out that the fixed nature of these fees can sometimes make an SMSF cheaper than a traditional fund, especially for a balance of more than $500,000.
For instance, at that point, if you were charged average fees of 1.12 per cent on a super balance of half a million you'd be up for $6,000 in fees a year. Meanwhile, the Australian Taxation Office reported that in 2012, the average SMSF with a balance of $500,000 had total operating costs of less than one per cent.
4. How has the fund performed?
Paying higher fees for an actively managed fund probably doesn't seem like a bad option if your super fund outperforms lower fee alternatives.
You can check how your existing fund has performed by looking at your super statement. Meanwhile, sites such as Canstar and Morningstar will let you compare the performance of multiple funds side-by-side.
Just remember, when comparing funds this way to look at the detail of each fund – especially which kind of assets they'll invest your money in and what type of investment strategy the fund manager employs. That way you'll at least be comparing like-for-like.
For instance, there's little use comparing a fund that invests primarily in Australian residential property to a fund that's heavily weighted to SMEs in emerging markets. A better metric to gauge performance is how the fund's growth compared to how the market they're invested in has performed.
5. What happens to your super if the worst happens?
If you're still tossing up between which fund to invest your super in, one last way to separate them may be to consider what insurance cover they provide.
That's because it's usually cheaper to purchase Total and Permanent Disability (TPD) insurance and life insurance through your super rather than outside of it. Both types of insurance can be vital if you want to make sure your spouse or dependents are looked after if you are seriously injured or die.
Many also offer income protection insurance. However, because this is tax deductible, it can often be cheaper to purchase it outside of your super.
Either way, you can find more detail about what you're covered for and what any premiums will cost in a fund's PDS.
And finally...
Choosing the right super fund should be a personal decision based on your age and retirement goals, as well as your risk appetite and preference for where your money is invested. But by spending a bit of time properly considering these five questions, you should be able to make a more informed decision about the kind of assets you want your super invested in, as well as the type of fund and fund structure that suits you best.
Glossary
Product Disclosure Statement (PDS)
The PDS sets out important information about a super fund so that investors can understand how it works. This includes details on the benefits and risks of investing in the product, as well as when benefits will be paid and details on how any fees and commissions are calculated.
Super statement: Every year your fund must provide you with a super statement to provide you with certain information about your super. This includes the past 12 month's information on :
- how the fund has performed, including your balance (both tax-free and taxable), any growth or loss you've incurred and where your super money is invested
- what fees you've paid
- what contributions you've made (and whether these were non-concessional or concessional)
- any insurance premiums you've paid, as well as any benefit you'll receive, and
- any tax that's been deducted.
Types of contribution
Concessional contributions are pre-tax contributions. These include any compulsory payments your employer makes on your behalf, as well as any payments you choose to make via 'salary sacrifice'. Concessional contributions get their name because you'll pay a concessional rate of tax on them (currently 15%).
Non-concessional contributions are sometimes known as your after-tax contributions that come from your after-tax pay. These payments don't receive any tax concession.
Types of super benefits
You'll notice that your super statement shows three types of benefits:
- Preserved benefits. You can usually only access this part of your super once you've:
- reached 65
- have reached your preservation age and stopped working, or
- met another condition of release.
Unless you've already reached the preservation age, any contributions you're currently making to your super will be preserved benefits.
- Restricted non-preserved benefits. This category only applies to some super contributions made before 1 July 1999. If you didn't make any super contributions before then you won't have any restricted non-preserved benefits. You can access these funds once you've finished working for the employer making the contributions.
- Unrestricted non-preserved benefits which you can access at any time. This may include money you've chosen to leave in your super fund after you've met a condition of release.
Preservation age is the day at which you can access your super. People born before 1 July 1960, have a preservation of 55. For anyone born after 1 July 1964 it is 60. You can find out more about preservation age on the ATO website.
Taxable versus tax-free components of your super
If you're still working and contributing to your super, the non-taxable component of your super should reflect any non-concessional contributions you've made (because these have already been taxed). Meanwhile, the taxable component reflects any concessional contributions you've put into your super since 30 June 2007, as well as any earnings your super investments have made. Until you reach your preservation age, you'll still need to pay tax on these amounts when you take out your super in the form of a pension or other payment.
Aged pension: A government payment for people who have reached 65 and who can prove they need financial assistance by meeting a strict income and asset test. The maximum pension as at 20 September was $1,348.40 a fortnight for a couple and $894.40 a fortnight for an individual. Couples who receive a combined annual income of more than $77,916.80 or singles earning more than $50,876.80 generally won't qualify for the aged pension.
Master Trusts and Wraps: Master Trusts and Wraps operate in a similar way, insofar as they allow investors to 'wrap' a range of investments into one portfolio. An important difference is that in a Master Trust, a trustee holds all investments on behalf of an investor whereas in a Wrap an investor usually holds the assets in their own name. Both Wraps and Master Trusts allow investors to access investments, such as wholesale funds, that usually wouldn't be available to them. A Wrap can also give investors access to direct shares. You can read more about the differences between Master Trusts and Wraps on the MoneySmart website.
Retail super fund: A retail super fund is a fund that's run by a bank or investment company. They generally offer a wide range of investments and usually allow anyone to join so long as they meet the minimum investment criteria.
Industry super fund: Industry super funds are not-for-profit funds that usually offer investors between five and 15 investment choices. As their name implies, many industry funds are only open to people within a particular industry. However, the larger ones tend to be open to anyone.
Types of insurance
Life insurance: This cover pays your spouse and dependents a benefit if you die in certain circumstances. Before working out the level of cover you need you should always think about what costs would still need to be covered if you weren't there, including any home loans, education costs and lifecycle costs.
Total and Permanent Disability (TPD) insurance: This provides cover if you become totally and permanently disabled and can no longer work. However, you should always examine the fine print, as some policies will pay a benefit if you can no longer carry out your current job, while others will only pay if you can no longer perform any job.
Income protection insurance: This pays you a benefit if you can't work for a period of time due to sickness or injury so that you can help meet your obligations.
