13 Aug Choose your Super Carefully
For the vast majority of Australians, superannuation is the best vehicle for long-term savings. Your super fund is important, both whilst you are contributing and also when making draw-downs to replace your working income. Most people now have the ability to choose both the type of super fund (e.g. industry fund, wrap account and self managed funds) and the investment options within that fund. The exception to this is those who are part of an award: e.g. doctors in some public hospitals or university employees who may be compelled to use a particular fund.
As the name suggests, industry funds are generally associated with particular industries. Some examples are: Hesta (health), CBUS (building), Rest (retail) and UniSuper (university employees). Many of these will also be open to all members of the public, the largest one being Australian Super. The funds generally have limited investment options; although, this has increased in recent years to include direct share investments as they try to stem the outflow of money to other types of superannuation funds which offer greater investment choice and flexibility. Industry funds are often the default fund for members who don’t make an active choice. Whilst this provides simplicity, the flip side is that many people end up with multiple funds if they have worked for different employers and have not made an active choice to consolidate their superannuation.
If you have seen the television commercials, the main selling point of industry funds is low fees – although with the introduction of MySuper all employers are required to provide a low-cost default option to employees and many of the retail funds now have MySuper funds which match industry funds in terms of fees. Depending on your line of work, industry funds provide insurance options which can be price competitive. The employer may also have arranged for Automatic Acceptance Limits for employees, which provide for a certain amount of cover without the need to complete any medical questionnaires. (Incidentally, this can also be on offer from retail funds where an employer category has been established.) This is particularly important for people who may have pre-existing medical conditions and would otherwise find it difficult to obtain cover at competitive premiums. However, a word of warning – the insurance cover offered by industry funds is usually of a lower quality than those available from retail funds, and there are many stories of bad claim experiences. This is not such an issue with life insurance, where claims are clear cut (i.e. on presentation of a death certificate), but can be more problematic when it comes to disability claims, where policy definition and claims experience are more important.
Retail funds are offered by financial institutions and are open to all members of the public. They offer investment choice and flexibility including personally underwritten insurance policies, which are usually of a higher quality than those offered by industry funds. Some funds will offer a choice of insurers. Traditionally, the fees are higher than industry funds, although competition over the past decade has narrowed this margin considerably.
Wrap Accounts are a type of retail fund generally available in conjunction with a financial planner and offer a very broad range of investments, including shares, managed funds, cash and fixed interest investments which can be tailored for your situation. They also offer a smooth transition to the retirement stage of superannuation, when your investments are used to pay you an income stream. Overall, these funds provide a good balance of control over investments and ease of administration.
Self managed superannuation funds
Self managed superannuation funds (SMSFs) provide virtually unlimited investment choice, subject to the superannuation rules which require investments to be made for the long-term retirement benefits of the member. Many people are drawn to SMSFs as they allow investment in direct property and include the ability to borrow funds as part of this strategy. Whilst this can be beneficial in certain circumstances, our experience is that this strategy is often over-sold. The end investment property needs to be of high quality, and we have seen many off the plan properties that just don’t stack up. However, for the right reasons and at the right time, this can be a useful strategy.
As a member of an SMSF you have a virtually unlimited choice of insurers; however, the policies will be subject to individual medical underwriting. An SMSF also provides a smooth transition to retirement without the need to sell assets of the fund, as well as flexibility in managing tax, which is not available with other types of funds.
The main downside is the requirement to do annual financial accounts and tax returns each year and the fact that, as the trustee, you are responsible for ensuring compliance with the superannuation laws. There are serious penalties for breaches, although, in our experience, these are rare if you are receiving good financial advice.
[titled_box title=”Case Study ” bgColor=”#ff8400″ textColor=”#ffffff”] Joel and Ilana gather their[pullquote3 quotes=”true” align=”right” variation=”orange” bgColor=”#ffffff” textColor=”#eda617″] Joel and Ilana are more engaged with their superannuation and decide to make voluntary salary sacrifice contributions of $1,000 per month to build their portfolio. This gives them confidence that they are planning for their retirement whilst enjoying the lifestyle they want today. [/pullquote3]superannuation statements, which have been accumulated in a To Do folder for their meeting with a financial planner. Joel has an Australian Super fund from his first job in 2003 and his current employer has been contributing to an AMP fund, which was set up by his parents’ financial planner five years ago. Ilana has been better organised and has all of her superannuation with AMP.
Their objective is to simplify their superannuation in a high-quality fund, and use their super contributions to fund their life and disability insurance premiums where possible. Their financial planner recommends a superannuation wrap account for this purpose.
Prior to rolling over the funds and cancelling existing insurance, their financial planner arranges for them to complete a medical questionnaire to provide an indication that they will be accepted for the insurance they apply for on standard terms. The process of applying for insurance and rolling over their funds is completed over two months.
Their financial planner recommends investment options which suit their objectives and will be adjusted based on market conditions. Joel and Ilana are more engaged with their superannuation and decide to make voluntary salary sacrifice contributions of $1,000 per month to build their portfolio. This gives them confidence that they are planning for their retirement whilst enjoying the lifestyle they want today. Joel and Ilana are more engaged with their superannuation and decide to make voluntary salary sacrifice contributions of $1,000 per month to build their portfolio. This gives them confidence that they are planning for their retirement whilst enjoying the lifestyle they want today.
Sacrificing $1,000 per month ($660 after tax) can net you an additional $680,000 in today’s dollars at retirement. This will allow you to increase your spending in retirement from $57,0001 to $93,0002[/titled_box]
1. ASFA Comfortable Lifestyle Index 2013
2.Under both scenarios graphed, we have assumed income and growth of 8 per cent per annum re-invested. Based on an individual currently aged 30. Tax benefits of pensions not included in the calculation.
About Reuben Zelwer
Reuben Zelwer established Adapt Wealth Management in 2011 to help time poor clients achieve financial freedom. For over 15 years, Reuben has helped professionals, executives, business owner and those approaching retirement make the most of their circumstances by making good financial decisions. Reuben’s professional practice is complemented by substantial voluntary work, which has included setting up financial literacy and savings programs in the local community.