To maximise retirement benefits, investors must be proactive in managing their super, warns Jeff Bresnahan.
I know super seems complex, but really it is not. The recent simplification of the tax laws in retirement means that super is now almost identical to your bank account. Money in and money out. Remember, you control both – both the level of contributions you make and who takes what money out of your account and for what services. The key to super these days is understanding ‘who’ is doing ‘what’ to your super account.
Not surprisingly, some funds are better than others, and it is important that you know whether you are in a fund that provides everything you need for reasonable value. As most of us have never formally reviewed our super, right now might be the time to do so.
Put it this way: if your bank took $2000 a year in fees out of your $100,000 investment account, would you shop around? Of course you would. Super is no different. What you get out of the system will largely depend on how much you pay in fees and the investment performance of your fund. You need to understand and compare both. Once you have these areas covered you are well on your way to maximising your retirement benefit.
There is a range of aspects to consider when evaluating the most appropriate superannuation fund for your circumstances; the following discussion focuses on some we believe to be the most important.
Strong long-term performance
It cannot be understated that fund performance will have the most significant impact on retirement savings, and there is a staggering difference between the best- and worst-performing funds and this can have a major flow-on effect to your retirement lifestyle.
Below is a graph which shows the difference between the best and worst-performing funds over the last five years, starting with an account balance of $50,000.
When assessing investment performance it is important to focus on longer term performance of at least three to five years. If your fund is underperforming over five-plus years, it may be time to review your fund because the underperformance will hurt you in the long run. Don’t forget, investment returns and fees are two of the most important things that will determine how much you have when you retire.
The recent market volatility has highlighted how important it is to match your investment choice with your risk return profile. Generally this means that, as you move into retirement, your appetite for risk (read ability to handle negative returns) may diminish and you may wish to consider investing more in defensive-type assets. On the other hand, the younger you are, the longer your investment timeline and the greater your ability to absorb negative periods while you chase larger returns. Don’t forget though, even those who are 65 still have some 15 years left from an investment perspective (hopefully!), so cash is not necessarily the answer.
Most funds offer a degree of investment choice, with the typical industry super funds allowing you to select from a range of diversified funds and some single sector funds. Retail funds, on the other hand, typically offer a much larger selection of funds, including a vast array of single manager options. While this may be suitable for some investors who want to construct their own portfolios, it is important that you don’t pay for unused investment choices, as generally the more investment options, the higher the costs. Some funds, from both sectors, also enable you to invest directly in a selection of Australian shares.
Fees are another important aspect to consider when assessing superannuation funds. The difference in fees between funds can be wide and fees alone can have a significant impact on your final account balance when taken into account over a longer period of time.
Superannuation funds can charge a number of different fees but they are typically classified as follows.
Investment management fee
This is usually deducted from your investment earnings and is used to cover the cost of the investment manager investing your money. These fees can range from just 0.1 per cent for a cash fund through to over 2 per cent for specialised investment funds. For a typical balanced option (which around 80 per cent of us are in) the fee is around 0.65 per cent. Be very careful that you are not paying high fees for simple options like cash, Capital Stable and Balanced options.
This fee is charged by the fund to cover the administration of the fund, e.g. processing transactions, issuing
reports, employing contact staff etc. This fee can be charged a number of difference ways, making it more difficult to assess. It can be a set dollar fee, e.g. $1 per week and/or a percentage based asset fee which is either deducted from the fund before earnings or directly from the member’s account.
Typically, dollar-based fees work out cheaper for higher account balances and percentage-based fees better for those with small account balances of, say, less than $5000.
Other fees to carefully review and compare include buy/sell spreads (which are effectively an entry fee), contribution fees (which you should never pay in super) and exit fees (these should be dollar-based and not exceed $100).
As a general rule you should not be paying more than about 1.5 per cent of your account balance in total fees per annum, or one per cent for larger balances of $100,000 plus.
Insurance is sometimes a forgotten element, but nonetheless important when assessing your retirement needs and objectives. The cost of insurance can also vary significantly between funds and, depending on the level of cover, this can also have an impact on you final account balance.
In most cases superannuation offers some of the best ways to obtain death, disability and income protection insurance. Not only can you pay the premiums directly from your super account and be entitled to certain tax deductions, but because most superannuation funds use their size to negotiate great premium rates, the premiums are usually much lower than you would be able to get if you went straight to the insurance company yourself.
Some superannuation funds also offer a level of automatic acceptance cover which means you can get a specific level of insurance cover without having to undergo a medical assessment. This can be of great benefit to those with medical conditions.
When deciding whether to switch funds it is important to look at the insurance offered under your existing fund and the insurance coverage for your new or proposed funds. Importantly, if you leave a fund where you have cover then you may not be able to get it at the new fund and you don’t want to find yourself out in the cold without insurance.
There is no doubt that the right financial advice can benefit most Australians, particularly in setting retirement goals and objectives and developing a plan to achieve those goals.
However, it is important that you are not paying for advice that is not being used. Some retail funds have financial planning advice built into their fees, regardless of whether the member receives advice.
While there is no doubt advisers should be remunerated for their services, it is important that members are aware of what they are paying and the services they are receiving in return. So make sure you read carefully the Product Disclosure Statement relating to your fund, and examine your Annual Statement with a fine-toothed comb.
Some funds are now offering simple superannuation financial advice for free or a relatively low cost. This can be particularly valuable for members who don’t want an ongoing relationship with a planner and simply want a straightforward question answered over the phone.
Mistakes to avoid
Don’t chase short-term returns either by switching super funds on the basis of their recent performance or switching between investment options while trying to time the market. As discussed earlier, members should focus on longer-term returns because this shows that a fund can consistently perform.
Members should also stick to their investment strategy, because in many cases markets can rebound quickly after downturns and you don’t want to be on the sidelines while the rebound occurs.
As mentioned at the outset, it is high time that Australians took ownership of their super. This means it is your responsibility to understand how your money is invested; who is taking what fees out of your account; what services you have available to you through the fund; and how much you have versus what you will need in retirement.
It is no good waking up at 62 years of age and realising that (a) you don’t have enough super and (b) everyone has had a picnic at your expense over the last few decades, managing your super fund. The time to do something is now – whether you are 20 or 60 years of age. If you don’t do anything, no-one is going to do it for you.
Jeff Bresnahan is founder and managing director of SuperRatings, an independent research centre that provides comparative ratings of super fund performance.
For more detailed information, investors can join SuperRatings’ SuperSavvy club (annual subscription, $80).
Phone (02) 9299 5300
MoneySmart, the consumer website for the Australian Securities and Investment Commission (ASIC), provides comprehensive information for investors. Visit www.moneysmart.gov.au.
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