Open any paper over the last few months and you will have heard some pretty amazing revelations from the Banking Royal Commission. Superannuation funds haven’t escaped scrutiny. To put the superannuation industry in perspective, according to the Australian Taxation Office, at 30 June 2017 over 14.8 million Australians had a super fund account holding a total of $2.3 trillion. 40% of Australians have more than one super fund. At the same date, almost $18 Billion was held by the Tax Office in lost accounts. And yes, those numbers are difficult to comprehend!
So if you feel super is a bit over-whelming, it would seem you are not alone! Let’s try and demystify some of the industry with a simple cheat’s guide to wrangling your super.
There are four main types of funds. Retail, Industry, Self Managed Superannuation Funds (SMSF) and Public Sector Funds.
Retail super funds are usually run by banks and investment companies (think names such as ING, AMP, BT, Colonial First State, LMC). Membership is generally open to all.
Industry Super Funds are run by a board which includes representatives from relevant employer industry bodies and unions. They run on a ‘not for profit’ basis – meaning any profits are invested back into the fund to benefit members. Historically they were to provide superannuation to workers of a specific industry but generally have expanded to be open to the general public. Names to think of include Australian Super, REST, HESTA, Cbus, Hostplus.
These two types of funds are regulated by the Australian Prudential Regulation Authority (APRA).
Self Managed Super Funds are private superannuation funds, managed by the individual members. They are regulated by the Australian Taxation Office. They are presently restricted to four members and all members must be trustees. The trustees are responsible for all decisions about how investments are made and to ensure that the fund complies with relevant laws.
These superannuation funds operating in Australia must comply with the Superannuation (Industry) Supervision Act 1993.
Public Sector Funds were created for Government employees (local, state and federal). They generally are only open to government employees.
That covers the range of funds available, but there’s some lingo to master too. A few of the key terms that you’ll probably encounter are…
MySuper. MySuper funds were introduced as a simple and low cost option for maintaining a super account. They also operate as a default fund where you haven’t advised your employer of your super fund. MySuper accounts are offered by Retail and Industry Super Funds. They have limited options for investment strategies and restrictions on the type of fees that can be charged. Think of them as a ‘no frills’ option.
Accumulation versus defined benefit funds. Most people will have an accumulation fund. These are funds where funds are contributed, earnings are reinvested and fees are charged. The total is the value of your fund. A defined benefit fund is one where the amount you receive on retirement is set (eg based on your salary at retirement) and is not dependent on earnings. They are not common and generally will apply to public sector funds. Most are now closed to new members because they are quite generous.
Concessional contribution and non concessional contributions. Concessional contributions are contributions made before income tax. They include the super contributions made by your employer, salary sacrificed contributions and other contributions where a tax deduction is claimed. Concessional contributions are subject to a rate of 15% tax. In 2018/19 the maximum concessional contribution is $25,000 per year.
Non concessional contributions are made into super funds from after-tax income and you cannot claim a tax deduction. The contribution is not taxed in the fund. However, earnings on all investments are subject to a rate of 15% tax. In 2018/19 the maximum non concessional contribution is $100,000 per year.
Investment options. Much is made of choosing investment options as the path you choose to take can have a significant impact on how your fund performs over time. Which option you should choose will depend on factors including age, time until retirement and your willingness to accept risk. For example a high growth option will have higher risk in that it may have more volatile returns over the short term (both large losses and large gains) but you would expect higher than average longer term returns. This option may not be for you if you’re approaching retirement. Usually a fund will have a default option, and so if you don’t specify an option, this is where you will be put.
Important things to note about investment options:
- They change over time and should be reviewed periodically – more frequently as you approach retirement and less frequently when you are young. Do not set and forget!
- There is no one size fits all. Two people of the same age will potentially have different investment options that are right for them.
- You cannot judge a fund’s performance by its annual result. You must consider returns over the long term.
Superannuation choice means an employer must give you the option of where you’d like your super paid into. If you do not provide your employer with details of your chosen fund, contributions will be made to the employer’s default fund.
There’s a whole lot more to super, but that’s for another time. The last thing that I want to cover though is the importance of having only 1 super fund. As already said, many Australians have more than one fund. What this means if you’re one of these people, you are potentially paying multiple administration and investment fees and insurances. Over time, this adds up significantly and can mean tens of thousands of dollars less on retirement. It’s your money – make it work in your favour!