When it comes to superannuation, the options can be overwhelming. This leads many Australians to simply stick with their employer provided fund and not explore their options. But there are many choices worth considering and ways you can take greater control of your super.
We have been dealing with compulsory superannuation since it first came into full effect in 1992. As a result, we are across all of the ongoing developments and the different ways you can invest your super funds. In our experience, many people may not be fully aware of how superannuation works, the options they have, and the fees involved.
Firstly, there are a variety of types of super funds to choose from:
Defined Benefit Fund
Defined benefit funds are mainly available for Government employees. This is a pension plan in which an employer or sponsor promises a specified pension payment or lump-sum (or combination) on retirement. This payment is predetermined by a formula based on an employee's earnings, tenure of service and age rather than individual contributions.
The default funds chosen by an employer are typically industry funds and 75 per cent or more of Australians stick with this default fund. These superannuation funds were originally established to cater for workers in a specific industry. The laws changed in 2005 to allow Australian employees to choose the fund that their employers pay into. So, you no longer have to stick with the default fund offered to you by your employer if you think another fund would serve you better.
Retail super funds were developed by financial institutions and insurance companies to help people invest and save for their retirement. Retail super funds offer investment expertise to their clients and charge a fee for that service.
Self-Managed Super Funds (SMSFs)
The difference between a SMSF and other types of funds is that the members of a SMSF are usually the trustees. This means that they run it for their benefit and are responsible for complying with the super and tax laws. SMSFs now make up 30 per cent of all Australian superannuation assets.
Taking control of your super
The number one way to take control of your super fund is by ensuring that you are investing in line with your risk appetite. While this doesn’t necessarily change each year, it should be reviewed every two to three years. It is important to sit down with an advisor who can help you with this and make sure that your investment preferences are reflected in your particular superannuation fund.
The three most popular ways to invest your money for retirement:
Actively managed super funds
There’s been a lot of debate in the news over the years about the high costs of actively managed super funds, which employ managers to beat market returns through stock selection. However, if their performance beats more passive index funds, you could be left with more money in retirement, despite the higher fees. However, it always pays to research and choose your fund carefully regardless of which option you go with.
Index funds are less expensive than actively managed super funds. Rather than trying to guess which investments will outperform in the future, index managers replicate a particular market or sector. This means they invest in all or most of the securities in the index. Indexing is based on the theory that investors as a group cannot beat the market – because they are the market – and they have lower fees. While this can leave you with more money in your super at retirement, it’s not a given if the fund underperforms the market. However, some index funds perform very competitively compared to more expensive actively managed funds.
Property within a SMSF
Investing in property through a SMSF has become an increasingly popular option. However, this is not as straight forward as many people think, and it can be quite complex. There are associated costs and rules and it is important to be aware of how this can affect your investment strategy. You’ll need to get the right advice, understand the tax regulations, find quality property investments, and make sure your superannuation portfolio is diversified.
Super fund fees
There are fees within all superannuation environments and some are a combination of the below and are expensive. This is why it’s so important to review your super – it’s fees, performance and risk profile – regularly with an advisor.
- Administration fees
- Funds under management fees
- Performance fees
- Advisor Fees
- Platform fees
- Audit fees
- Set up costs
Get the right advice
Some super providers are only available from Financial Advisors. These funds can be a great opportunity for you to reduce your fees and obtain a superannuation option that you may not normally have access to. Finally, don’t let your superannuation fund sit in the drawer to be taken out at retirement, by then it’s too late.
We’re happy to talk to our clients anytime about their superannuation options.Call us on (02) 8268 2900 for an obligation-free chat.