Is Your Superannuation Costing You More Than It Should?

How well do you trust your super fund? Not all of them are consummate professional outfits and reports have been trickling over the past week on allegations of misconduct in the financial industry by among others, financial services providers and super funds.

The most common types of misconduct include the fee-for-no-service scandals and overcharging customers for financial advice. There have also been instances of financial institutions continuing to levy fees on long dead customers.

Trustees in superannuation funds are charged with managing the funds for the best interests of the fund members but some of them do not live up to their responsibilities and fall for the temptation to swindle members of millions of dollars of contributions. Some of these may simply be misdemeanors or behavior that may be considered unethical rather than criminal. Some trustees prioritize profitability over the best interests of the members. In some cases, they will prioritize the interests of their sponsoring organizations over those of members.

There are also widely varying rates of fees charged on customers as well as rates of returns which will have a direct bearing on how much you will be left with upon retirement. Some customers lose track of the actual number of superannuation accounts that they have and this may result in a loss of contributions. On average, people will have a couple of super accounts and having multiple accounts is a costly undertaking as the user has to pay multiple sets of fees and insurance for each of the accounts. Some members even find themselves unable to claim insurance for at multiple sets of fees or insurance as they will end up losing too much money.

If you are struggling with complexities of superannuation, there are multiple things that you can look at to help you get a good deal and avoid being ripped off:

Check the fees

When it comes to superannuation, any slight differences in the fees, costs and investment performance will have a huge impact on your long term returns. If the annual fees are 2% rather than 1% of your account balance, you’ll end up reducing your returns by up to 20% over a period of 30 years.

All super funds in Australia are required by law to include this fact as a disclosure under their product disclosure statement due to its substantial impact that fees levied by super funds have on savings. You don’t want to wake up one day in your retirement to discover you may have hemorrhaged hundreds of thousands of dollars in savings simply because you chose a poorly performing plan or one with higher fees and costs.

Many funds have reduced fees to up to 1% of the account balance but you have to be cognizant of the various types of fees charged by super funds. Super funds usually levy two types of fees namely, the administration fees and the investment fees. The administration fees vary from fund to fund and can range from $70 to $4000 annually.

On the other hand, the investment fees will vary from 0.6% to 2.5%. When the investment fees are levied annually, the charge should be on your end-of-financial-year (EOFY) statement. Look at the dollar amount in fees which you are paying annually and convert this into a percentage of your total worth of your super. If the percentage comes to about 1%, then you are in safe territory. Converting this into percentage also makes it easier for comparison purposes.

Compare the performances

Go for super funds that will give you excellent returns. According to The Productivity Commission, a fund that delivers in the top 25% of products will give $635,000 more in returns when you are retired compared to one that is ranked in the bottom 25%. It’s therefore a no-brainer that if you want the best performance, you simply have to choose any of the top 25% of products. If you start working at the age of 21 on a $50,000 full-time salary, you would lose 13 years worth of pay by the time you retire at age 67 if you put your money in the worst performing super funds.

Picking the right fund for your needs may be complex but one of the core attributes you should look for is its returns over the past five to ten years. Deduct the amount fees paid to the fund to get an accurate estimate of returns,. Some funds advertise figures that don’t reflect the actual returns that they have delivered in the recent past. According to the Productivity Commission, the underperforming funds generated a return of approximately 3.9%. If you have a fund that is generating anything less than this, then you are certainly in the red zone.

Some funds use dishonest tactics to mask low returns such as calculating returns without factoring in the fees charged thereby creating a façade of better performance. The returns would drop drastically once you deduct the fees.

Work out the investment options

This is another key factor to consider when deciding which fund is suitable for you as it will have a substantial impact on how much you will be left with. The default option offered by many funds is a mish-mash of high and low risk options. Most people will be comfortable with this.

The high risk options give higher returns but they tend to plunge steeply when the market crashes. The higher risk options are generally not recommended for those that are close to retirement as market crashes could potentially wipe out a lifetime of savings just as the contributor is about to start making withdrawals. However, younger people can afford to take risks. If you are still in your 20s, you still got time to plough back some money even after catastrophic losses. When you are young, higher risk options may also mean impressive long term returns.  On average, the higher risk options will deliver better returns compared to the safer low returns.

Are there any extra benefits?

There are benefits that may accrue from making the contributions yourself into your super account. Some employers may also contribute more than mandatory 9.5% super guarantee requirement into your super account and this may come with certain benefits. When shopping for a super account, look at the extra perks offered by the fund. Some of these are quite attractive and may result in greater financial rewards.

Will you need insurance coverage?

Many super funds provide members with default death insurance coverage. It’s important to be careful, however, as you might end up with multiple insurance policies in case you have multiple funds and this might impose an unnecessary cost burden on you.

Even if you have a single policy, it’s worth evaluating whether you need the insurance coverage on offer in the first place. This is particularly so if you are older, paying off a mortgage, are no longer working or supporting a family. If you have multiple financial obligations, you may decide to forgo the insurance policy provided by the super fund.

Whether you will need some form of coverage will be dependent on your needs. If you have multiple dependants who might need your income down the line, then it’s highly advisable to take out a policy.

If you will be taking out a policy, you might also consider factoring in the expected increase in premiums a few years down the line. Some policies might have cheap introductory charges but these will increase dramatically within a few years. The upside with super fund insurance coverage is that you won’t require a medical check to take one.

Any extra services?

Go through the fund website and see if they offer any extra services that you might be financially beneficial. There are funds that package their services with extra add-ons such as personal financial advice which can be helpful if you have extra cash with no idea on where to invest it.

They will usually offer specific advice tailored to your situation and the advice is generally cheaper compared to that offered separately by a financial professional such as a financial adviser. As much as super funds will offer you quality advice, you should back it up by doing your own research or contacting an accountant Melbourne professional for independent counsel. At the end of the day it’s your money and you should be careful about the disparate proposals you will receive.

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