You want your super fund performing at its best, with minimal risk, to ensure you receive the returns you want for your future. For this reason, it’s important to understand all there is to know about your super fund, and the fees, features and long-term prospects involved. There are several different types of super fund, and choosing the right one will set you up for a happy and comfortable life during retirement. Here, we look at seven key points you should consider in choosing a super fund, and we also outline the possible risks involved in investing in superannuation.
1. Fees
In short, the lower the fees, the better. Account fees can detract from your savings and impact the payout when you retire. Annual fees can range from hundreds to thousands of dollars, depending on the type of fund you have and your super account balance. It’s important to compare fees across different accounts when choosing your super provider.
2. Investment options
A good super fund should afford a number of investment opportunities, with options to suit your needs with minimal risk. Only compare funds that have similar investment strategies or those that have a similar mix of shares, fixed interest and cash. If you’re a decade or more from retirement, you should invest mostly in Australian or international shares and it’s best to go with a low-cost industry fund or a fund that lets you choose which shares to buy.
3. Extra benefits
Your employer is permitted to pay more than the 9.5% minimum for certain super funds. Similarly, if you contribute extra money yourself, you can reap the benefits of extra interest and a bigger payout come retirement. If this is something that interests you, choosing a super fund based on its flexibility is a good idea with long-term benefits.
4. Performance
When looking at the performance of super funds, it’s best to look at trends over a five-year period – not just in the previous year. Remember, superannuation is a long-term investment and you want to make sure your fund is performing over an extended period of time. Also, don’t forget to look at taxes and fees when comparing the performance of certain funds.
5. Insurance
Most industry funds offer income protection, life and total and permanent disability insurance. When choosing a superannuation fund, it’s important to check what cover is available and how much it’ll cost. Be aware low-fee funds might not offer insurance, and this is something that should be considered in choosing your super fund or changing between funds.
6. Services
Special features and services like financial planning or investment advice can be part-of-the-parcel with many super funds. It’s important to do your research to see what services certain funds provide, and how they align with your needs and goals. As well as this, it’s important to make sure you’re not paying for services you don’t need!
7. Type of super fund
There are many different types of super funds. Here, we list the pros and cons of a few popular options:
MySuper
MySuper is often the go-to super account for employers if you don’t specify a fund yourself. MySuper accounts offer lower fees, simple features and single or lifestage investment options. MySuper is offered to retail, industry, public sector, corporate, and accumulation funds.
Retail fund
Retail funds are accumulation funds that are are often run by banks or investment companies. They offer multiple investment options (sometimes hundreds of options!) and usually range from mid to high-cost. Anyone can join a retail super fund, and the recent initiative by some major retail funds to offer low-cost options makes them an attractive option across the board. It’s important to note that the company that owns the fund retains some profit earned by the fund.
Industry fund
Typically, anyone is welcome to join the larger industry funds, while other, smaller funds, are only open for employees in a certain industry. Most industry funds are accumulation funds, with a few older funds having defined benefit members. Industry funds usually have between five and 15 investment options available, and are primarily low to mid-cost. Industry funds are typically ‘not for profit’ funds, and all profits are returned to the fund for the benefit of its members.
Public sector fund
Most public sector funds are open to government employees and are also ‘not for profit’ funds. They have a modest range of investment choices and very low fees. Many long-term members of public sector funds have defined benefits, while new members are usually in accumulation funds. Some employers contribute more than the 9.5% minimum to public sector funds.
Corporate fund
Corporate funds are arranged by employers for their employees. Some of the larger funds are ‘employer sponsored’ funds, while others are operated by a large retail or industry super funds. Corporate funds are usually low to mid-cost for big employers and high-cost for small employers. They generally only accept the minimum employer contributions. Some older funds have defined benefit members, while most others are accumulation funds.
Eligible rollover fund (ERF)
These funds act like a holding account for lost members or inactive members whose account balances are low. ERF has low investment returns and often charge high fees. By consolidating your ERF with your active super fund, your savings are more likely to grow faster.
Self-managed super fund (SMSF)
An SMSF gives you control over your investments. It can involve between one and four members who are called trustees, and who can access a broader range of investments. It’s important to be careful in switching to a SMSF, as the costs of running the fund may be higher than what you’re currently paying and money in the fund can only be used to provide retirement benefits. However, if you have the time, and are confident in keeping up with changing super laws and investment trends, an SMSF can be a valuable option.
Accumulation fund
In an accumulation fund, the value of your super will depend on your chosen investment option, how many fees you’re charged, as well as how much money your employer contributes – plus all those extras that you contribute, earn through investments or receive as bonuses. While accumulation funds can be beneficial in boosting savings, if financial markets drop, you bear the risk that your super payout will be less.
Defined benefit fund
The majority of defined benefit funds are corporate or public sector funds and many of them are closed to new members. The value of your retirement benefit will depend on how much money your employer contributes/extra you contribute, how long you’ve worked for your employer, and your salary when you retire. For example, if you’ve been a member for 25 years, your retirement benefit may be worth 5 times your final salary (lump sum) or 75% of your final salary (monthly payment) until you die.
The risks of super
Like any other financial product, every super fund comes with certain risks. These can include:
- Interest rate risk – Interest rate changes can positively or negatively affect the value or capital return of your super.
- Market risk – Changes in the market can directly or indirectly create an environment that could positively or negatively influence the value of investments in your fund.
- Underlying investment risk – The value of an underlying investment can change due to factors specific to it. For example, changes to company management can affect share prices and impact your investment.
- Legislative risk – Super tax laws and the extent to which you can access benefits could change, e.g. tax on super could go up or down, and laws regarding lump sums or pensions could change.
- Liquidity risk – For an investment/asset to be liquidated quickly, it may be sold at a significant discount, which could negatively affect the overall performance of your super fund.
- Timing – The duration of your investment (the longer, the better) can affect your withdrawal benefit. The performance of the market at that time may also affect your withdrawal benefit amount.
- Currency risk – If your fund invests in overseas assets, it’ll be exposed to overseas currency. So changes in the value of the Australian dollar can affect the value of those assets. If you hedge international investments, currency volatility can be mitigated.
- Redemption/switching delays – The trustee could delay the processing of a request to withdraw or switch investments if they can’t be redeemed or properly valued.
- Other risks – Your super fund could close, fees and expenses could increase, or investment professionals could change.
As you can see, there are countless elements involved in choosing the right super fund for you and your future. It’s important to do your research and look into the features, benefits and annual fees for each fund. If you’re looking to switch funds, ensure you find a successful fund with good returns and low fees – that way you can rest easy, knowing your future is under control.
