A failure to understand superannuation rules may be costing you thousands.
MySuper is supposed to be the easy, low-fee option for Australians; however, a failure to understand the rules may be costing you $100s in fees.
For those who fail to nominate a super fund of their choosing, MySuper is the default fund into which your employer will pay your superannuation guarantee. However, any funds accumulated prior to the commencement date of MySuper (1 January 2014) may still be sitting in a high-fee fund chosen by your employer. This is because accumulated funds do not need to be switched to MySuper funds until 1 July 2017.
While many people may believe that money sitting in a fund only attracts a small fee if no advice is given, Fairfax’s John Collett reports that this is not correct. Commissions for financial advice may still be charged even if no advice is given, and this is where people are losing out.
If your super has been paid into an industry super fund by default, then there is less to worry about, with industry super funds charging no commissions. But if it has been paid into a retail fund, such as one operated by the big four banks, then your balance could be dwindling away unnecessarily.
While fees are not the whole story, as funds with higher fees can pay higher returns, not understanding the effect of such fees could well be detrimental over the life of a super fund.
All funds charge an administration fee, which should be no more than a few dollars each week. On top of this some funds will charge an investment management fee (or commission), which is a percentage of the account balance. This is the total fee paid.
According to SuperRatings head of research, Kirby Rappell, any total fee below one per cent is very competitive, with MySuper Funds typically charging between 0.8 and 1.2 per cent. Even if you have chosen MySuper as your default fund, you still need to be on top of the commission you are being charged, MySuper funds may be limited in the types of fees they can charge, but they are not in the amount they charge and there is no cap or limit on fees.
AustralianSuper research shows that paying just an extra one per cent in total fees over your working life could result in a super fund balance having $100,000 less by retirement.
And its not just high-fee funds that can damage your retirement nest egg. Holding several super funds, even if the fees are low, could see your savings quickly eroded. AustralianSuper estimates that 2.5 Australians hold more than one super fund and that this can amount to $5550 less at retirement, even if you hold just one extra fund.
Read more at TheAge.com.au
It doesn’t matter which simplified funds, such as MySuper, are brought onto the market, the fact remains that super is just too confusing for most Australians to understand.
Back in 2012, we were told that MySuper would remove the stress of choosing a super fund for those who don’t have access to expensive financial advice, or whose super balances perhaps don’t warrant paying hundreds of dollars in fees. However, the staggered roll-out of legislation means that many hard-working Australians who assume that their super is working just as hard may be caught out come retirement. Who would know that super accumulated in a default fund prior to 1 January 2014 doesn’t need to be moved to MySuper until 1 July 2017? Not your average worker I’m betting.
And if your super balance isn’t that high, surely paying fees of one or two per cent isn’t going to make much difference? If this is what you think then you’re very wrong. The smaller the balance the more vigilant you have to be with minimising the fees you pay.
Let’s not forget ‘lost super’. While we’re told to track down all our super funds and accumulate them into one, this is easier said than done. The reason that many super funds become lost is due to funds not being able to contact members, which is largely due to the funds holding the wrong details for that member. So when you try to search the ATO ‘Find my super’ database, a negative response is often given because the details you are using are different to the ones held by a fund.
Despite what we’re told, nothing is simple in the world of superannuation, yet all access to information and low-cost or free advice is being stopped. The closure of the National Information Centre for Retirement Investments (NICRI) earlier this year, coupled with the confusion over the Future of Financial Advice (FoFA) reforms have left those with limited funds, who are approaching or in retirement, nowhere to turn.
Governments can call for submissions for white papers until the cows come home. The Productivity Commission can deliberate and produce recommendations until its hearts is content. But until someone fully understands the confusion and fear faced by those trying to ensure that they maximise their superannuation, then the average Australian retiree will be no better off.
Is it time to tackle superannuation in a comprehensive manner? Or do you think the system we have works well enough if people try better to understand it? Should superannuation funds be more accountable for the fees they charge?
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