How well do you trust your superannuation fund? With the horror stories that have been emerging in the recent past about misconduct in the financial industry, you wouldn’t fault many Aussies for being a little extra cautious about their dealings with banks, superannuation funds and other financial services providers.
Many financial institutions have been found to be engaging in unethical conduct ranging from fees-for-no-service to overcharging their customers. In one particular extreme case, a bank was found to have been levying fees on more than 4000 of its dead customers which added up to millions of dollars!
Trustees are generally charged with prudently managing their finances in the best interest of their members but that is not always the case. Besides, there is a great deal of product and service differentiation in the industry. In the case of superannuation funds, the most obvious issue is the large variation in the fees charged and the return rates. These costs may seem small but they are eventually going to impact, in a big way, the amount of money that many retirees will be left with. Choose the wrong vehicle and they may end skimming off a sizeable chunk of your retirement savings in fees and costs.
When assessing the performance of your superannuation funds, start by logging into MyGov so you can establish the number of super accounts that you might have. Most people own multiple accounts and they may not even be aware of the fact. Financially, this can be a risky approach as you will have to pay different sets of fees for the insurance. There are instances where you aren’t even allowed to claim sets of insurance covers for two sets of policies and you will simply end up throwing money down the drain.
Before choosing a super fund that will hold your retirement savings, consider looking into the following:-
Check out the super fees
This is perhaps the most important consideration and every super is required by law to disclose the fees it charges. It is critical because the small changes in the performance and investment fees in a super fund will have a massive impact on your long term super returns.
As an example, if the total fees and costs of your super fund amount to 2% of your balance instead of 1%, the tiny 1% difference will wipe out 20% of your financial returns over a period of 30 years. That is just how critical the super fees and costs are.
When shopping for a super fund, most people will assume that paying a 2% in fees and costs instead of 1% won’t be such a huge deal. However, they fail to think long term and factor in the compounding effect of money. Can you imagine losing 20% of your savings over a 30 year period simply because you failed to shop for a smarter super option?
Super funds usually charge an administration fee and an investment fee. The fees could be charged monthly or annually. Where they are charged annually, they will appear on your end of the financial year (EOFY) statement. Find out how much you have paid and then convert this into a percentage of what your entire super for the account is worth. If the fees are less than 1%, then you have latched onto a great super fund. If it is more than 2%, you are being ripped off and you may need to begin comparing and shopping for other funds.
Compare the performance of the various super funds
Research and compare the various super funds in the market in order to determine the one that will give you the best returns. If you are starting work at 21 with a full-time salary of $50,000 and retiring at 67 and you are putting your money inside a superannuation fund that is performing at the top 25% of the funds, you will earn a whopping $635,000 more than someone who starts in a similar situation but puts their money in a super fund that ranked at the bottom 25% of the super funds. Just like the super fees and costs, the performance of the fund will have a massive impact on your retirement nest egg. If you are putting your money in a poorly-performing super fund, your lost savings will literally be worth several years of your pay.
When evaluating fund performance, look at the returns of the super fund over the past five to ten years. Based on data by the Productivity Commission, the ten best MySuper products gave investors an annual median rate of return of 5.7%. If you find a super fund that offers you rates better than this after the super fees have been subtracted, that will be an awesome deal.
The underperforming super funds are giving an annual median rate of return of 3.9%. This should at least be the lower threshold so if you are getting anything lower than this, that is a rip-off.
Deciding on your investment options
A typical super fund investment portfolio provides a mix of high-risk and low-risk options. Each has its advantages and will highly impact what you will be left with. While the high risk investments will give you a higher rate of return, their drop will just be as dramatic if the market tanks.
If you are still young and still got years to work and modify your investment strategy, you can afford to build a portfolio of high risk options. However, if you are nearing your retirement age, it is recommended that you go for safer and more conservative options as you may end up losing much of your savings should your high risk investments fail to materialize.
Are there any extra benefits?
Does the super fund provide any extra perks? What extra benefits is the super package offering? Go through the website or call and see if they offer any extra perks. These can range from professional financial advice to income protection insurance among others.
Does it offer some insurance packages?
Some super funds provide extra products such as default death insurance. This is may not necessarily be ideal for you as you might end up with multiple insurance policies if you have many super funds. In the end, this will end up costing you more in insurance costs.
Before you take up an insurance cover provided by a super fund, decide whether you will actually need the cover in the first place. Some super funds provide income protection insurance which may be ideal for you if you are supporting a family or are older and may no longer be working in a few years’ time.
When buying insurance, it is important to factor in the possibility that the premiums may increase a few years down the line. Some policies may start cheap but the costs may dramatically in the future and that will present a new financial burden. However, getting an insurance policy through a super is generally advantageous because in many cases, you will not need to undergo a medical check.