In this article- our experienced financial adviser- Chris Brown, discusses some common superannuation myths and misconceptions.
Superannuation is an asset class or a type of investment
Superannuation it is not itself a type of investment. Its better to think of a super fund as being a tax structure or an investment vehicle and within that you can save and invest into different types of investments (or ‘asset classes’) including shares, property, bonds, and cash.
Some people also mistakenly think they have no say in how their super fund is invested. While in the most common retail and industry funds there are default investment options for those who do not wish to choose for themselves- this does not prevent members from choosing investments if they wish- which suit their preferences and comfort levels.
There are limitations on the choice of the underlying investment options depending on the fund. The available investment menu can range from a small, limited offering in some funds (for instance in some employer and industry funds), right up to an extensive menu containing hundreds of investment options (for instance in some retail and ‘wrap’ super platforms). In self-managed super funds this investment choice extends further into non-traditional asset types– but this comes with a higher degree of responsibility and complexity, as well as greater monetary and time resources required.
Superannuation fees are consistent across funds and easy to compare
One of the key things a super member can control at all times is the administration and investment fees they pay along the way. While a fund’s Product Disclosure Statement contains all possible super fund fees- these are sometimes hard for consumers to read and easily interpret. Some funds emphasise in other communications the administration fees of a fund- while not discussing the indirect fees of the investments (that still impact the member’s final net return).
We generally find superannuation returns are fairly similar over time in different funds when they are invested in a similar fashion i.e., ‘Balanced’ or ‘Growth’. But the fees paid to earn those returns can vary widely. Despite overall fees tending to reduce over the super industry in recent years- it is surprising that some of the least competitive fund fees are sometimes large corporate/ employer funds and non-profit industry funds. It’s important to be aware that just because a fund is ‘non-profit’ it doesn’t guarantee they are delivering the individual members an optimal outcome in terms of costs (just like an inefficient charity).
Another challenge to consumers is that it can be difficult to conduct a quick comparison of fund fees– as funds with more expansive menus may have hundreds of investment options to choose from. This means it is difficult to determine ‘the fees’ of that fund as there are vast amounts of investment combinations possible that would result in different fees.
Think about fund fees in the way you look at the expenses of other assets. Say you had two similar investment properties in the same street, earning the same rent, but the property management fees on one were much higher- this would impact the overall return earned. This is what happens when super fund fees vary between funds.
‘I don’t believe in super’
We sometimes here from people who say, ‘I don’t believe in super.’
This is sometimes driven by the view that the government will change the rules. Sure, there are adjustments made to superannuation, but in general we find changes to the major superannuation laws tend to impact those younger first who have decades to adjust to these new rules rather than pre-retirees or those about to retire.
Others feel disconnected to their superannuation and that it is not real money, or that it is ‘monopoly money.’ However, the money in a super fund is certainly real!
The employer paying an employee’s super fund knows that these are real funds coming out of the business bank account. The retiree receiving regular payments from their superannuation fund in retirement – spends this money on real products and services. This is real money and deserves our attention.
You should at least want to know where over 10% of your wages are going each year and take advantage of one of the lowest taxed structures we have in Australia for building wealth.
My super is paid at the same time as my wages
Sometimes people refer to their payslips in relation to when their super fund receives contributions. However, employer super contributions on payslips are showing the amount of superannuation accrued each pay cycle, but that doesn’t mean a payment was actually paid into the employee’s super fund yet. Employers must only physically pay super each quarter, and to assist business cashflow some employers will only pay quarterly.
You need to ensure if you are an employee that you receive at least four payments into your fund every 12 months. Its best to check your super fund statement or online to ensure contributions have been received by your fund (even if showing on payslips).
If you are missing super contributions past the relevant due date for lodgement– you can use the Australian Taxation Office’s online tool to let the them know that your employer hasn’t met their superannuation obligations. They will investigate the matter, keeping you informed and if missing super can be retrieved it will be paid to a super fund in your name via the ATO.
I must (or should) withdraw my super when I retire
Compulsory cashing or withdrawal of superannuation does not exist. Those over sixty-five have the flexibility to choose whether to withdraw their super when they wish as a regular salary like payment and/ or in lump sums.
There are attractive benefits to retain funds in the superannuation environment in retirement. A major benefit is the 0% tax on investment earnings after age 60 that applies to most superannuation balances (up to a limit) once the fund starts paying a qualifying retirement income stream.
Some people might have valid reasons for a large withdrawal at retirement- such as paying off a remaining mortgage. But in general, the tax effectiveness of the super environment means that withdrawing all funds from super- just to invest or save it – could be a poor decision.
Insurance is not important
Insurance is not important, is a cost always paid by an employer or the fund or does not need to be considered if rolling out of a super fund. These statements are all wrong!
Insurance in super is normally an extra cost paid by the member in addition to the other super fund fees (there are some exceptions for instance where an employer has agreed to pay for some insurance costs while they are employed).
The types of life insurance available in a super fund – being life (death), total and permanent disability and income protection (or salary continuance) insurance can be extremely important to someone or their loved ones in the event of an expected death, illness, or injury.
Having life (death) cover would mean that the total death benefit for beneficiaries to receive can be much greater than just the accrued superannuation balance. This means care should be taken with death benefit nominations given a sometimes larger than first thought payout might occur on death- when factoring in insurance claim proceeds.
The ‘group insurance’ often attached to employer and industry super funds is normally unable to be transferred between funds. Applying for new life insurance cover generally requires financial, occupational and health ‘underwriting’ approval by the insurer involved. This means that before rolling out of a super fund, members should consider their insurance needs carefully as once the fund is closed- the attached insurance is normally cancelled as well and cannot be reinstated.
As ‘group insurance’ policy terms are less generous and can be cancelled or modified by the fund at any time, a more comprehensive ‘retail’ life insurance policy (generally only available through a licensed financial adviser)- should be considered. In addition to more comprehensive policy terms which cannot be altered once in place, retail policies can offer more flexibility to change payment to any super fund you wish or outside superannuation or a combination of both- without losing coverage.
I can’t control what happens to my super if I die
There is also a misconception sometimes held that you can’t control where the money you have accrued in your super fund will go when you pass away. However, members can in fact control where their super death benefits are paid.
In general superannuation monies do not form part of someone’s estate and therefore making a valid beneficiary nomination to a valid beneficiary- can ensure those funds go directly to beneficiaries without passing through the estate (and open to contestation) or waiting for the estate to first finalise.
Paying super benefits directly to minor children can cause access issues for a surviving spouse who may need to use these funds, whereas direct payment to adult non dependant beneficiaries generally results in tax applied to superannuation death benefits (but this doesn’t happen to spouses receiving superannuation death benefits).
Other times it may be beneficial for super benefits to be paid to the person’s estate on death and a corresponding beneficiary nomination to this effect can be made.
Blended families, as well as vulnerable, spendthrift, and estranged beneficiaries, also present unique considerations and challenges when considering superannuation beneficiary nominations.
Superannuation beneficiary disputes cause many super fund complaints heard by the Australian Financial Complaints Authority. So, the decision as to who should be the beneficiary should consider the unique broader estate planning, taxation, and financial considerations of each individual, and ideally should be made in collaboration with a qualified legal practitioner.
Superannuation is the only tax structure to invest in
There are in fact other investment structures and products- which can be tax effective while still offering investment choice and the ability to build wealth. These may have more flexibility in terms of making changes later, might suit those who feel they are too far away from the superannuation access age to invest significantly in that structure, or they may be unable to contribute any further funds into superannuation based on age, or due to the amounts already contributed to superannuation. Alternative investment structures should complement and work alongside superannuation in a coordinated strategy.
If there are superannuation questions you have that you would like to discuss with a financial adviser, or if you would simply like to know how you are tracking towards your goals and objectives- you can book a private initial phone call with Chris here.
This information is general in nature and has been prepared without considering your objectives, financial situation or needs. You should, before acting on any advice, consider its appropriateness to your circumstances (including your objectives, financial situation and needs). You should also consider the relevant PDS before making any decision about any product.
