One of the most critical financial decisions that you will make during the active part of your life is selecting a super fund. With the difference between a high-performing fund and a bad-performing fund potentially adding tens of thousands of dollars to your retirement nest egg, selecting a fund requires careful analysis. It is better to make this choice with help from a superannuation advisor.
Whether you are self-employed or an employee receiving mandatory superannuation advice contributions from your employer, you can usually choose your fund.
However, there are certain exceptions. Some people who are protected by collective bargaining agreements or are members of certain defined benefit plans may not have an option. Most super funds are now accessible to all comers, but not all. Some firms, for example, provide low-cost funds to their staff alone.
Other sorts of funds may have historically attracted specific categories of members, such as public officials or union members, but now allow all applicants. Wealthy people and those who wish to have a company or investment property in their super fund sometimes want to operate their own self-managed super fund.
Whatever your circumstances, as an Australian superannuation advisor, we advise that you consider all of your alternatives before making a final decision. It’s also important to realize that your fund selection is not a life sentence. If you are dissatisfied with your fund for whatever reason, you are free to move funds if you have the option.
Varieties of Superannuation Funds
The following are the five categories of funds:
- Industrial investment funds: These used to cater to workers in certain sectors across different work sites, but most are now available to anybody. They often provide a restricted menu of pre-mixed investment alternatives designed to satisfy the needs of the majority of individuals. Larger funds, on the other hand, frequently enable members to choose their own shares, ETFs, and term deposits. They are often low-cost non-profits, which means that revenues are reinvested in the fund for the benefit of members. Most provide both accumulation and pension funds.
- Federal government funds: Some of these non-profit funds, which were originally established for federal and state government employees, are now available to the public. They often provide a restricted range of investment alternatives, as well as cheap costs and excellent member service. Some employers contribute more than the Superannuation Guarantee minimum. Older members are more likely to be in defined benefit programs, whilst younger members are more likely to be in accumulation funds.
- Mutual funds for retail investors: Banks and other financial organizations manage these funds, which are available to all investors. People who contact a financial adviser or planner are typically provided a retail fund through an administrative platform with access to a diverse selection of assets, which can number in the hundreds. The majority of retail funds are medium to high in cost, with advice and platform fees. They are generally accumulation funds, and the business that runs the fund keeps a portion of the profits.
- Self-managed superannuation funds (SMSFs): DIY investors seeking greater control or flexibility can set up their own super fund or make it a family affair by involving their partner, adult children, or other family members, up to a maximum of six members. All members must be trustees (or directors if there is a corporate trustee) and are accountable for all investment choices and compliance with applicable regulations. There is no minimum investment, but start-up and yearly operating costs might be substantial, especially if you utilize administration and other services. Visit our SMSFs section to learn more about self-managed super funds. The Australian Taxation Office (ATO) regulates SMSFs, whereas the Australian Prudential Regulation Authority (APRA) regulates all other forms of funds.
Defining the difference between accumulation and defined benefit funds
Most funds nowadays are accumulation funds, so named because your investments increase and expand while you work. Defined contribution funds are another name for accumulation funds. What you get out when you retire is decided by what you put in (employer and personal contributions) plus investment profits and how that money is handled, minus taxes and fees.
Defined benefit funds are being phased out gradually, but that doesn’t mean they’re useless. Indeed, some defined benefit plans are quite generous. Most are corporate or public-sector funds, and they are frequently closed to new members. Their allure stems from the concept that you are assured of getting a “defined” benefit at retirement, regardless of how well the markets or the fund perform.
Your retirement benefit in a defined benefit fund is determined by how much you and your employer pay, how long you have worked for your company, and your salary when you retire. This explains why fund managers were eager to convert to an accumulation fund model, where members bear the risk rather than the fund management.
If you are fortunate enough to be a member of a reputable defined benefit fund, do some study before being persuaded to move to an accumulation fund by a financial consultant or anybody else. Staying put may be in your best interests.
Eligible Rollover Funds
An eligible rollover fund (ERF) is a holding account for inactive or lost members with small balances. By law, all super funds must designate an ERF to hold the balances of their deceased or disqualified members. ERFs must be registered with APRA and are only intended to be used as temporary storage facilities.
Some ERF providers may attempt to locate your active super fund in order to reconcile you with your lost money. Consolidating money from an ERF into your current account can save you money on fees and allow you to have a bigger amount compounding and collecting for your retirement. Qualified rollover funds, like other superfunds, invest money and charge fees; some do a better job and charge lower fees than others. They cannot receive recurring payments from your employer, unlike other super funds.
Small APRA Funds
Small APRA Funds (SAFs) are APRA-regulated super funds with fewer than five members. They are basically self-managed super funds, except instead of member trustees or a corporate trustee with members as directors, they have a professional trustee.
- People who want control over their super but don’t want the trustee responsibilities
- Seniors who have lost the ability to manage their own funds because all trustee responsibilities and compliance obligations are handled by an independent trustee.
- A disqualified person who is unable to administer an SMSF but can have a SAF
- Individuals who relocate overseas and are no longer able to serve as SMSF trustees.
Retirement Savings Accounts
Some, but not all, banks, credit unions, building societies, and life insurance organisations offer retirement savings accounts (RSAs). They provide a straightforward, low-cost option to save for retirement, but the trade-off is that the returns are only marginally higher than the interest earned on normal bank accounts.
RSAs are capital guaranteed, which implies that only fees and charges can diminish the balance, not investment losses. They are totally transferrable, so you may move the amount to another RSA or super fund at any moment. They can also receive transfers from super funds and are governed by the same regulations as super funds, although they are organised as bank accounts rather than trusts.
These accounts are becoming increasingly rare considering that most people are automatically enrolled in a super fund when they begin working. They saw a brief burst of prominence in the aftermath of the GFC, when individuals sought the security of a capital guarantee, but they have since fallen into obscurity.
If you’re deciding between two funds with comparable performance histories and rankings, extra services and advantages that aren’t necessary related to your field of work may come into play. Personal financial counselling, access to direct shares or a sustainable investment choice, insurance, or an easy transition into the retirement period with a decent pension package are examples of such services.
Contact a superannuation advisor Sydney at Omura Wealth Advisers to help you out on which best super funds to select.