Superannuation is a very tax effective investment vehicle. Smart decisions made early can have significant value later through compound interest. You may have a greater ability to influence the results of your superannuation than you think. How well your super does ultimately has a lot to do with the choices you make and the actions you take.
There are 3 key decisions you need to make
- How much do I contribute to super and how frequently will you contribute?
- What is my super invested in?
- Which super fund should I choose?
How much do I contribute to super and how frequently will you contribute?
Contributions have a very real impact on the performance of your fund. You can choose to make contributions that might reduce your tax by using a strategy called salary sacrifice. Or you can put money in from your savings. Either way you need to get the magic of compound interest working in your favour. Did you know that $1,000 saved today and invested wisely, could be worth more than $13,000 in thirty years?
What is my super invested in?
Have you made an active choice on how your super is invested? No? You’re not alone. The majority of people rely on their employer to select a default fund. If you take this approach, you may end up having 40 per cent of your super invested in cash and bonds which may not be the most appropriate strategy for you. Given super is a long term investment it makes sense to consider a decent weighting to more aggressive investments.
Which fund should I choose?
There are 4 main types of super funds in Australia, which we’ll explore in detail below. Before we do there are a number of things you should consider when assessing the right super fund for you;
- Fees and charges
- The type and number of investment choices
- The type of insurance cover offered
- The ease of access to information
- Are you required to do much of the work?
Retail super funds
Retail funds are usually run by the major banks or investment companies and are open for anyone to join. There are a huge number of funds in this space. They offer a wide choice of investments, including direct shares with transparent pricing. And a comprehensive range of insurances.
We now see a big range in fees and charges across retail funds and some are now offering a low cost alternative. In some cases they are cheaper than industry funds.
In our experience retail funds are the most appropriate vehicle for most of our clients. It’s important to note that these funds are not all the same. Therefore we would always suggest seeking advice on which fund is most suitable for you.
Industry funds began with trade unions wanting to provide superannuation options for their members. To begin with these funds were offered only to members. However, over the years membership of some of the larger ones have been opened up to the general public.
If you have a low superannuation balance with low levels of contributions and don’t need insurance an industry fund may be appropriate.
However, we have found that whilst they claim to be low cost this is often misleading due to a lack transparency in their fees. For example administration fees may be low but investment fees are high.
They lack transparency in their investment choices and how they are reported compared to other types of funds.
Add to this a limited investment choice and insurance options. We have also found that insurance claims through industry funds aren’t as smooth as they are with other types of funds.
Self Managed Super Funds (SMSF)
SMSFs are a relatively new super option for Australians and were created to provide a greater level of control and choice for those that are looking for a more hands on and personal approach to superannuation.
An SMSF allows you to set up your own superannuation fund with each member becoming a trustee. There is a considerable level of responsibility:
- You need to choose the investments within your fund
- Keep records and provide an audit by an approved SMSF auditor each year
- Ensure that your investments and activity is focused on providing for your retirement
Greater control and flexibility
An SMSF can provide you with more control than most other superannuation options. You have the flexibility to determine how and where your funds are invested and how you are going to operate the fund.
Additional benefits may also include:
- You may combine your resources with up to 4 other members to increase your asset base and reduce fees
- A greater level of flexibility in setting up and managing pensions
- You can transfer personally owned assets such as listed shares, business real property and managed funds into your SMSF
- The ability to own business real property within your SMSF
- Potential tax advantages when you purchase property with a debt instalment warrant you can claim interest cost deductions on top of the depreciation benefits associated with the property
SMSF work best when you have a specific strategy that you can’t do via a retail or industry fund. For example buying direct property or buying your business premises within your fund. If you do have a specific strategy in mind make sure you get good advice.
Corporate fund are arranged by an employer, for the benefit of its employees. This can be facilitated by the appointed Board of Trustees, or at times managed within an industry super fund or large retail fund. They offer:
- A moderate-to-wide range of investment choice
- Low cost insurance, which can be good for those who might not otherwise get insurance cover
- Low-to-moderate costs for large employers, but higher for small employers
- Some older corporate funds provide defined benefits for members, while the majority are accumulation funds
Super success begins with you. It’s your choice who administers your super, how your funds are invested, as well as how much money you are putting aside. We would always recommend talking to an experienced financial planner to help you make the right decision for you.
The information contained in this blog post is general advice and does not consider your individual objectives, financial situation or needs. You should consider whether the advice is suitable for you and your personal circumstances. Before you make any decision about whether to acquire a certain product, you should obtain and read the relevant product disclosure statement. Should you have any questions please contact us on 02 9232 6800.