From various conversations with clients, friends and family, it is apparent that many of us don’t understand superannuation. Common sentiments are along the lines of;
- “it’s my retirement nest egg and I know it’s important”; or
- “it’s kind of like a managed fund”;
For those who have ever seen a super fund ad, it’s pretty clear that advertising briefs are very loose on substance. A lot of ads give us an insight into the lives of well heeled and well-aged silver haired couples driving to their third holiday home, all courtesy of that great super product.
There’s the ad that has a bunch of good looking young people throwing paint clusters at a wall with the catch phrase “you move, so should your super”. The copywriter that came up with that zinger deserves a month off… let’s just overlook the tenuous link to superannuation and how that product differentiates itself.
Taking the cake on sheer volume of advertising is the clasped rhombus shaped hands made by every available demographic of Australian. These industry super fund ads, whose funds are only there to profit members, the media companies that place the ads and the union officials acting as fund trustees, do at least differentiate themselves on price. Some funds, like Australian Super have also facilitated direct equity access which is a great step forward.
For the wealth of exposure the superannuation industry provides itself, there remains an apparent cloud of complexity about what superannuation actually is.
So what is Superannuation?
Superannuation is simply a savings & investment account specifically designed for retirement. Unlike your everyday savings or personal investments, you can only access your superannuation at retirement (or a condition of release in specific circumstances).
In exchange for this restriction of access to superannuation wealth, the government has afforded your superannuation very generous tax concessions. So, instead of superannuation savings and investments earnings being taxed at your personal marginal rate of tax, tax is capped at a flat rate of 15% during the contributing phase and when you convert your super into a pension, the tax typically reduces to zero.
So why are there so many funds?
The above rules apply to all superannuation funds. So although there are many hundreds of super fund products available, they all essentially operate in a similar capacity within the broader regulatory framework. The main difference between super funds is the degree of investment flexibility afforded to members and the administration and investment costs levied for fund membership.
What super fund should I use?
Generally speaking, if you have a low investment balance in superannuation (<$50,000), it is important to manage costs effectively. Your lower balance does not afford you scale to undertake more assertive investment strategies. A wholesale retail super fund or reliable industry super fund will be appropriate for your needs.
Beyond the $50,000 threshold, low cost super funds continue to provide value to investors who are not assertive in managing their investments. For more assertive superannuants, value begins to emerge in funds that provide more flexibility to access things like direct equities (lower investment management costs) and Separately Managed Accounts (SMAs). SMA’s will provide professionally managed direct ownership of equities in a potentially more tax effective manner than what is available in through basic super funds.
As your balance grows beyond the $300,000 mark, you may begin to consider the merits of a self-managed super fund (SMSF). As an individual superannuate there is little value on cost alone in kicking off an SMSF until you are well beyond this mark, potentially as high as the $500k mark. Couples however may benefit from pooling SMSF management and administration costs if their combined balances are greater than this $300k rule of thumb. SMSF’s afford greater control and more diverse investment options (including direct property). You should seek advice before taking this step. We will discuss SMSF’s in more detail in an upcoming article.
What to look out for?
When getting started there are some things to be mindful off;
- Watch out for default insurance. When setting up a super fund, you may automatically be given life insurance within your fund. This may result in insurance premiums that may not be necessary in your stage of life;
- Avoid having multiple accounts. Each account has a fixed administration fee so the more you hold, the higher the cost base associated with managing your funds.
- Take the time to nominate an investment preference. If you are you young and your super is likely to be invested for the next 20-30 years, it is madness to accept the default “balanced” investment allocation. Over such a long investment time horizon, you do not want a material amount of wealth sitting in low yielding cash and fixed interest investments for more such a long period of time. Most “balanced” funds have around 30% of savings invested in cash and fixed interest.
- Do not have your income protection insurance owned through your super fund. Although it makes for a great sales pitch because it doesn’t come out of your pocket, it only affords your super fund a tax deduction at 15% as opposed to your, likely, much higher marginal tax rate. Your net wealth loses out.
Remember, just because you can’t spend your superannuation now, it doesn’t make it any less your wealth. Making assertive decisions while you are young can have a big effect on your quality of life in retirement.