Superannuation Funds - May 6th
Scott Morrison delivered his first Federal budget this week, outlining the Coalition’s economic plan and providing an economic policy for the upcoming election. The majority of changes relevant to “mums and dads” relate to superannuation …– Read more
Superannuation Funds - May 5th
There were no large shocks in the 2016 federal budget, but for high income earners there was a foreshadowed – and confirmed on the evening – change to the taxation of superannuation. Whilst some middle income …– Read more
Superannuation Funds - April 29th
What is the gender retirement gap? At nearly 18%, the gender pay gap has barely changed since the very beginnings of our compulsory superannuation system more than two decades ago. While this is a significant gap …– Read more
In 1992 the Superannuation Guarantee (SG) came into effect, giving working Australians an opportunity to boost their retirement savings. Over that time, superannuation has enjoyed bipartisan support and is now a key investor in the Australian economy and a fundamental component of our future retirement incomes. From an asset base of almost $2 trillion currently, superannuation is expected to continue growing substantially over the coming decades.
These current and future trillions of dollars represent one of the largest pools of funds under management in the world. This will help to ensure retirement security for millions of Australians. The flow of superannuation investment into shares, property, bonds, infrastructure and cash is a key driver of our economic growth.
This investment occurs within a secure and well-regulated legal framework that requires superannuation trustees to act in the best interest of members when managing their superannuation savings.
Given that superannuation will represent the bulk of retirement savings for many Australians in the future, choosing a superannuation fund should be a well-researched strategic decision. While CANSTAR does not research the entire superannuation market, it does provide some assistance to workers wishing to compare superannuation funds. CANSTAR?s 2014 Superannuation Star Ratings report researched and rated 74 superannuation funds that are directly available for individuals to purchase without an intermediary. What to look for in a super fund
In July 2005, legislation came into effect to enable many Australian workers to actively choose the superannuation fund into which their super contributions (SG) would be made. While the choice of superannuation fund initiative gave workers the power, the actual choice of a fund became very complex with a large number of products, such as retail and industry funds, vying for the consumer investment dollars.
There are a number of different types of superannuation platforms in Australia. The most common types of super funds are:
Many super funds offer a new type of account called MySuper. MySuper will eventually replace existing default accounts offered by super funds. A default super account is one chosen by your employer if you don?t choose one yourself. MySuper accounts offer:
MySuper will only be offered for accumulation funds and not for defined benefit funds. Retail, industry and corporate funds can all offer MySuper accounts. You can read more about MySuper here.
The larger industry super funds are open for anyone to join. Some others are restricted to employees in a particular industry. The main features of an industry fund are:
Retail funds are usually run by financial institutions or investment companies. Generally, anyone can join a retail fund and they often have a large number of investment options. You can either apply to join a retail fund directly, or they may be recommended by your financial adviser who may be paid for their advice by fees.
Cost can vary significantly between retail funds so it is worth carefully comparing your options. Industry versus retail super funds
A corporate fund is arranged by an employer, for its employees. Some larger corporate funds are ’employer sponsored’ funds where the employer also operates the fund under a board of trustees appointed by the employer and employees.
Other corporate funds will be operated by a large retail or industry super fund (especially for small- and medium-sized employers). Features of these funds include:
These funds were created for employees of Federal and State government departments. Most are only open to government employees. The main features are:
Do it yourself super suits some people who want the hands-on control that comes with a self-managed super fund (SMSF). Of course, with added control comes added responsibility and workload. SMSFs can be suitable for people with a lot of super and extensive skills in financial and legal matters. You must be prepared to research and track your super investments regularly if you want to manage them yourself. You can set up your own private super fund and manage it yourself, but only under strict rules regulated by the Australian Taxation Office (ATO). An SMSF can have between one to four members. Each member is a trustee (or director if there is a corporate trustee). Running your own fund is complex. You must:
You can find out more about self-managed super funds here.
Before making a decision on what type of superannuation fund might be appropriate for you, it is worth speaking to an Independent Financial Planner, as some professional guidance now can make a significant difference in retirement.
The types of superannuation investments can be many and varied. While “conservative” and “balanced” and “growth” investment options are common, it is important to realise that your superannuation funds are being directly invested into businesses, properties and other commercial projects around the country. From the roads you drive on, to the hospitals you might visit, to the office building you work in and the products you buy at the shops, your superannuation is helping to boost the Australian economy. Find out information here about changing your super investments.
Some common superannuation investment portfolio mixes are outlined below.
Super Fund Pre-Mixed Investment Strategies – The most common levels in pre-mixed investment strategies are Income Funds, Balanced Funds and Growth Funds. A super fund can have a minimum of 3 pre-mix options upwards. The strategies are based on the percentage mix of portfolio applied to the asset classes. The most common asset classes are cash, international and domestic shares, property and fixed interest (e.g. bonds etc).
Sector/Specialist Super Funds – In order to diversify an investor?s portfolio, funds also offer investment into sector/specialist funds. Most of these funds are either managed in-house or outsourced for the benefit of members. The common sector or specialist funds are made up of Australian shares, international shares, Australian property, international property, Australian fixed investments and international fixed investments. Some funds also invest in specialist markets like emerging markets in Brazil, Russia, India & China or Asian and European markets. They also offer specialist investment options in geared and capital guarantee investments. Further options include small cap companies, blue chip funds etc.
Direct Shares Superannuation Funds – Certain funds also provide the option of investing in direct shares and apply a brokerage fee for the transaction. Some offer only Australian stocks while others will invest in international markets.
Life insurance is another important element in your choice of super fund. Most funds are able to provide options for cover in the case of death, disability or illness, which can help you and your family get through any unexpected events prior to retirement. In fact, some of the income protection policies within super even continue to make the Superannuation Guarantee (SG) payments while you are off work, so that your retirement savings can continue during this time.
Check on the types of insurance offered within your fund of choice. The main options are:
Also investigate the level of cover offered as this can differ significantly between superannuation funds.
According to superannuation news released by the Australian Taxation Office (ATO) in February this year, 45% of working Australians still have more than one superannuation account. As at 31st December 2014, there was a staggering $12.5 billion of lost super being held by the Australian Taxation Office. According to the statistics, this included approximately $248 million in the ACT, $2.7 billion in Queensland, $1.5 billion in Western Australia and a whopping $4.2 billion in NSW.
Finding lost superannuation is reasonably easy and we have outlined the details here. If you?re lacking motivation to get it done, why not try out a superannuation calculator such as this one, to see just how much that lack of motivation could cost your retirement savings! How to find lost super
Concessional contributions – When it comes to superannuation, there is a limit to the amount of “before tax” money that can be paid into your account each financial year. Since its introduction, the upper limit on what you can pay in – known as the “concessional cap” – has ranged between $50,000 for those aged under 50 and $100,000 for those aged over 50, down to $25,000 for all. On 1 July 2014, the concessional caps for super contributions changed again and currently those aged 48 or under as at 30/6/14 can make no more than $30,000 in concessional contributions. Those aged over 48 can make no more than $35,000 in concessional contributions. Concessional contributions include:
Superannuation Guarantee (SG) – This is a form of concessional contribution. The SG is the compulsory superannuation payment that your employer must pay on your behalf, if you are eligible. Most employees are eligible; whether you work full time, part time or casually. You can check the current rate of SG and the conditions for payment on the Tax Office website at www.ato.gov.au.
Salary Sacrifice – This is also a form of concessional contribution. wIt is a superannuation contribution hereby the employee agrees to sacrifice a part of their gross salary in exchange for a benefit, such as extra employer contributions to superannuation. An annual contribution limit applies. What is salary sacrifice.
Non-concessional contributions – Broadly, non-concessional contributions are the opposite of concessional contributions, in that they are made with after-tax money. Even though you are not claiming a tax benefit when you make a non-concessional contribution to your super fund, there are still limits on the amount you can pay in. This is because the earnings within a superannuation fund are also taxed favourably – so without a limitation the amount that could be paid in, superannuation could become a tax haven for wealthy individuals. For the 2014/2015 tax year, the non-concessional cap is $180,000. Please always confirm current rates with the Australian Tax Office.
Co-contribution – A co-contribution is essentially a non-concessional contributions. However if you earn less than $49,488, making a non-concessional contribution may make you eligible for a government co-contribution. The amount of co-contribution you are eligible for will depend on your income and the amount you contribute to your superannuation fund. The maximum rate of co-contribution is $500. If you are eligible the co-contribution will be paid into your super fund automatically.
Contributions tax – This is the tax deducted from any concessional contributions that you make. For the majority of people the rate of contributions tax is 15%. As an example, if your fund was to receive a concessional contribution of $1,000, contributions tax of $150 would be deducted, leaving $850 in your super fund account. Some high income earners (with an adjusted taxable income of more than $300,000 per annum) are charged a higher rate of contributions tax, currently 30%. Your superannuation fund can provide more specific details of the contributions tax that will apply to you.
Tax on earnings – The money in your superannuation fund is earning an income. This may be via interest payments, share dividends, rental income… The earnings within your superannuation fund are taxed at a rate of up to 15%.
Withdrawal tax – At the time of writing, most withdrawals made from superannuation funds, provided the person withdrawing money has reached preservation age, is tax free. The exceptions are if the beneficiary has not reached preservation age or if the super fund is an untaxed fund. In these instances the amount of tax payable will depend upon the age of the beneficiary and/or the fund balance. Please seek advice from your accountant in this instance.
According to a recent report by the Australian Taxation Office (ATO), Aussie workers are still wasting plenty of money on the fees attached to duplicate superannuation accounts, with an estimated 45% of workers having more than one super account. And when it comes to superannuation fees, there are a few common ones to be aware of, including:
Member fee – This is the fee charged to be a member of the superannuation fund. It typically covers the cost of holding your account.
Administration fee – This fee is generally to cover the administration expenses associated with managing your account, such as the cost involved in allocating your contributions to your account and providing annual statements. This fee may be tiered depending on the amount you have invested in your super fund.
Investment fee – This is the fee charged by the investment manager(s) contracted to receive and invest your superannuation contributions. It is generally expressed as a percentage of the funds invested and will differ according to the investment options chosen.
Performance fee – The investment manager may charge an additional fee (expressed as a percentage) if they outperform agreed performance benchmarks.
Why do you need to be aware of your fees? Because a small difference in cost can make a large difference to your retirement nest egg.
For its star ratings assessment, CANSTAR divides superannuation investors into four broad life stage profiles, as follows.
Starter – Starters are in their early working years, just starting out in their career and building a deposit for their first property. They typically have a low super balance and are not too concerned about too many investment options. Low fees are important.
Builder – Builders are developing their career and likely to have a first home and mortgage. They are starting to have a decent superannuation balance, although they are probably making minimal additional contributions to superannuation. They are looking for long-term growth.
Wealth Accumulator – This lifestage is focusing on repaying the mortgage. They may be considering home renovation or considering buying an investment property. Holidays and family memories are important and they have accumulated a large amount of super. They are likely to be looking for more advanced investment options to accelerate growth. They have a long-term plan for wealth accumulation including super and non-super investments.
Pre-Retiree – The pre-retiree is in the process of finishing work, or working less. They may be downsizing their home and now hold minimal debt. They have a larger super balance and typically have a more conservative approach towards retirement investments. They are likely to be considering how super will be used to achieve their retirement plans.
Please note that these are a general explanation of the meaning of terms used in relation to superannuation funds and related investment activities.
Policy wording may use different terms and you should read the terms and conditions of the relevant policy to understand the inclusions and exclusions of that policy. You cannot rely on these terms to the part of any policy you may purchase.
Refer to the product disclosure statement and Canstar’s FSG.
Account-based income stream/account-based pension – A pension paid (generally on retirement) from superannuation benefits standing to the credit of your account. For most people aged 60 and over, these pension payments have been tax-free since July 2007. Previously, they were known as allocated pensions.
Annuity – An investment, purchased with a lump sum that guarantees to pay a set income for either an agreed number of years, or for life. Generally, your money is locked away for a fixed period or for life, though some annuities allow early withdrawals or for a ?residual capital value?. The income payments may be indexed each year, often in line with inflation. Some annuities allow for reversionary beneficiaries (see definition below).
Australian Prudential Regulation Authority (APRA) – The Federal Government body responsible for the regulation and monitoring of the insurance and superannuation industries.
Australian Securities and Investments Commission (ASIC) – The Federal Government body responsible for administering and enforcing the Corporations Act and laws to protect consumers in the areas of superannuation, investments, insurance and banking.
Balanced fund – An investment portfolio that spreads its holdings over a range of high-growth and lower-growth asset classes. An average balanced fund is often used as a benchmark for funds to compare their investment performance.
Bear market – A market in which prices decline sharply in light of widespread pessimism about economic conditions. The opposite of a ?bull market?.
Benchmark – Usually represents the minimum performance objective for an investment portfolio.
Bull market – A market in which prices rise in light of widespread optimism about economic conditions.
Concessional contributions – Superannuation contributions made from before-tax income for which a tax deduction can be claimed. They are also referred to as deductible contributions. Concessional contributions include employer Superannuation Guarantee (SG) contributions, additional employer contributions (salary sacrifice) and contributions made by the self-employed for which they claim a tax deduction.
Conditions of release – These are restrictions placed on superannuation funds for how and when preserved benefits can be paid. A condition of release must be met before a benefit is paid. The following conditions of release have ?nil? cashing restrictions. These include: retirement, reaching age 65, reaching preservation age and permanently retired, death, permanent Incapacity or termination of employment and the benefit is less than $200
Contribution cap – This is the limit on the amount of contributions that can be made for an individual. Contributions in excess of the cap will be subject to excess contributions tax. Concessional and non-concessional contributions have different cap amounts.
Direct share investment available – whether or not you can invest in securities as an individual with the fund, rather than as part of an aggregate group.
Dividend – The amount a company pays out to its shareholders from its after-tax earnings. For individual shareholders, the payout is in proportion to the number of shares held. When company profits are down, the company may decide to pay a reduced dividend, or no dividend at all.
Excess concessional contributions tax – A tax of 31.5% on your super contributions over the concessional contributions cap.
Fund-of-funds – A fund-of-funds is a single fund comprising a variety of different investment funds all wrapped up into one fund.
Growth investing – Investing for capital gain through company earnings. See also ?Capital gain?
Growth phase – A superannuation interest is said to be in the growth phase if the member has not satisfied a relevant condition of release (see definition above) or the member has met a relevant condition of release but no benefit has been paid in respect of the superannuation interest. A superannuation interest will still be in growth phase where a member receives a benefit (other than a pension or annuity) as a result of satisfying a relevant condition of release, but is still entitled to receive further benefits from the fund.
Income protection insurance – insurance that pays benefits to you if you are unable to work due to illness or accident.
Insurance cost – costs for insurance in the event of death or TPD (total and permanent disability).
Investment fee – how much you must pay your investment manager, or the MER %. This typically depends on the investment option you choose.
Lump sum – A benefit payable as a single cash payment or as several part payments rather than as a pension or annuity.
Management fee – how much it costs to pay the fund for managing your super balance, this is usually tiered by balance level.
Membership fee – how much it costs to join the super fund
MER % – the management expense ratio, or what proportion of your investments you must pay your investment manager. For example: In an equity fund where the historical gross return might be 10%, a 1% expense ratio will consume approximately 10% of the investor?s return. In a bond fund where the historical gross return might be 8%, a 1% expense ratio will consume approximately 12.5% of the investor?s return. In a money market fund where the historical gross return might be 5%, a 1% expense ratio will consume approximately 20% of the investor?s historical total return.
Nester – consumers accumulating wealth and building for the future. They?re investing in ways outside their super: a first home, cash, etc. They don?t contribute much to their super and seek long term growth with low fees.
Non-concessional contributions – These are contributions made from a person?s after-tax income. The terms ?non-concessional contributions?, ?post-tax contributions? and ?after-tax contributions? are often used interchangeably
Number of investment funds – the total number of funds the super institution has to offer – across all subcategories and strategies.
Number of pre-mix strategies – the available number of different investment strategies, ranging from “conservative growth” to “balanced growth” to “aggressive growth.” More funds mean more strategy options.
Outperformance – Obtaining a higher investment return than a benchmark or other measure against which that return is compared.
PDS – Product disclosure statement
Performance fee – how much you have to pay your investment manager for exceeding benchmarked performance.
Portfolio – An investor?s range of investment holdings. Usually it refers to its composition, i.e. the mix of different asset classes or, if in a single asset class like shares, the mix of different sectors and shares.
Pre-retiree – those approaching retirement with a large super balance and who are looking for a more conservative approach toward retirement investment.
Preservation age – The minimum age at which members can access their superannuation benefits, provided you have permanently retired from the workforce.
Salary sacrifice – An agreed arrangement between an employer and an employee whereby the employee agrees to sacrifice a part of their gross salary in exchange for a benefit, such as extra employer contributions to superannuation. An annual contribution limit applies.
Starter – consumers who are new to work or in their early working years. Typically they have very low super balances (less than $40,000) and aren?t concerned about investment options – they look for plans with the lowest fees.
Superannuation Guarantee (SG) – Employer contributions are usually called Superannuation Guarantee (SG) contributions. Currently the minimum level of SG contributions is the equivalent of 9% of ordinary time earnings. This money is not taken out of your wage or salary; it is paid in addition to your wage or salary. An annual contribution limit applies.
Transition to retirement available – an available income stream that you can use before you are 65 in order to transition into retirement by working fewer hours and supplementing your salary with income from your super.
Unclaimed superannuation – Superannuation that people have lost.
Value investing – Investing in an asset that is seen as undervalued and selling when the asset is overvalued. This type of investing tends to run counter to market trends.
Wealth Accumulator – peak of their earnings period, have accumulated a significant sum in their super fund and are looking to accelerate growth.
Withdrawal fee – A fee that a fund may charge when you make a full or partial withdrawal.
Yield – The return of an investment, expressed as a percentage. Can also refer to the profit that an investment is likely to return.
There are more than 350 super funds in the market that are classified as personal super, corporate super, SMSF products, public sector super, wrap/platform accounts, industry funds, retail funds, master trusts, etc. Many of these funds are not available directly to the average person. The customer may be required to be employed by a particular government department or large corporation, or it may be necessary to see a financial planner first.
We have therefore limited our superannuation star ratings to funds that are available to the average person, i.e. anyone can apply directly to the fund.
We have focused on the accumulation stage, when funds are being contributed to superannuation, not the drawdown stage following retirement. We have not credit rated the super fund managers.
The superannuation, SMSF and account-based pension funds that CANSTAR has assessed for its 2014 Star Ratings are listed below.