Ingredients Of A Good Financial Plan – Part 5 Superannuation
MBA, BSc, DipFP
Financial Planner / Managing Partner
What You Need To Know About Superannuation
Superannuation is one of the cornerstones of any financial plan. Getting your Superannuation right can mean the difference between a comfortable retirement and spending your time counting pennies.
Traditional Super funds provide you with an enormous range of options. It can be confusing, because everyone tells you their fund, their structure, their options are the best. And it is hard to compare because often you are looking at apples and oranges. But the Superannuation options you choose can make a big difference to your final retirement amount.
Importance Of Super In A Financial Plan
If you are working in Australia you have no option but to have a Superannuation account. And that is a good thing. It’s never too early to start planning for your retirement. But you might not know of some of the real benefits of investing in Super over and above the 9.5% of your salary mandated by the government.
- Tax – salary sacrificing and voluntary personal contributions are a great way to minimise your income tax burden whilst at the same time saving for the future. And once you retire both your capital growth and income is protected from tax.
- Insurance – most Superannuation comes with an insurance component, which doesn’t require a medical examination. It is also often less expensive than stand-alone insurance.
- Investment Options – individual investors don’t often have the funds to invest in large assets. Being a member of a Superannuation fund gives you access to these types of investments, while maintaining diversification in your portfolio.
Types Of Superannuation Accounts
Broadly speaking there are two types of Superannuation accounts:
- Accumulation – as the name suggests, in this type of Super your funds accumulate over time, based on the money put in and investment returns. These days most Super funds are Accumulation funds.
- Defined Benefit – with these funds your retirement benefit is based on a formula related to your income and years of service, not investment returns. This style of fund is becoming less and less common.
All Super accounts fall into one of these two structures.
Super Fund Categories
One of the key decisions you need to make in relation to Super is whether to go with an Industry fund, a Retail fund, or if available to you, a Corporate Fund.
Industry funds are not-for-profit, and there are a huge number of them. Some of the smaller funds can only be joined by people working in their particular sector, but the larger ones can be joined by anyone. Most of these funds are Accumulated, and are low to medium in terms of costs.
Anyone can join these funds, which are usually run by banks or investment companies. They offer a wide range of investment options and are generally mid to high cost.
Are only open to employees. Some larger organisations run their own funds, while others use a retail provider.
Public Sector Funds
As the name suggests, Public Sector Funds are only open to government employees.
In 2011 the Gillard Government introduced MySuper. This is a default account for people who don’t choose a specific fund when joining an employer. Retail, Industry and Corporate funds can offer a MySuper option if they choose. These accounts are designed to be low cost, simple and easy to compare. They offer a limited range of investment options, and according to the Productivity Commission Report of 2018, 1/3 of these funds underperformed the median in the preceding 10 year period.
All Super funds offer different investment profile options. How you choose which works best for you depends on:
- Your age
- Your risk profile
- Your length of time till retirement
Whilst the names of options within some funds may differ slightly, broadly speaking your investment options are:
- Growth – generally around 85% shares/property and 15% fixed interest. This option offers high growth and return, but carries are higher risk than other options.
- Balanced – 70% shares/property and 30% fixed interest. This is a medium to high risk strategy with an expected medium to high return.
- Conservative – 30% shares/property and 70% fixed interest. A low risk, low return option.
- Cash – 100% invested in cash deposits. Thanks to the Australian Government Banking Guarantee this is a no risk option, however the returns, particularly in the current market, are so low as to be almost non-existent.
- Ethical – this is a new investment option for many Super funds. Investments are screened to eliminate companies that don’t meet certain standards of environmental, social and governance practices. This option can sit anywhere on the risk/return spectrum.
Multiple Accounts & Lost Funds
According to Superguide.com.au, one in three Super accounts is an unintended multiple. This is not ideal as you are likely to be paying fees on each one. If you would like to find out if you have multiple or lost Super funds, a financial adviser can help you find them, and consolidate them into one account, optimising your return and minimising fees.
How Do You Choose The Right Super Fund?
It can seem like a very complicated decision, but if you get the right advice it doesn’t have to be. Things to consider include:
- Performance – look at this over a minimum of 5 years, preferably 10 in order to get a good picture. Super is a long-term investment.
- Fees – these can eat at your funds. If the fees are high, even if the fund is performing well, it might not be worthwhile.
- Insurance – most Superannuation carries with it insurance. If you want to keep this option check whether the cover, benefits and exclusions suit you.
- Investment options – does the fund offer an investment option that suits your needs, now and into the future?
- Additional Services – are there add-on services and products that would be useful to you, and how do they impact the fees and charges?
And remember, nothing is forever. If you have a Super fund that is no longer right for you, for whatever reason, don’t be shy about doing the research, getting good advice, and changing if that proves to be the best option for you.
Manly Financial Services has many years’ experience in evaluating, choosing and planning Superannuation. If you would like advice on whether you are on the right track, give us a call on (02) 9976 3388, or click below and we will be in touch shortly.Interested in knowing more?