June 19, 2017/ News
Superannuation: we all have a basic idea of what it is. Although, once it gets down to the nitty-gritty of understanding it and being able to successfully choose the best fund for you, it can be overwhelming and cause quite a bit of confusion. Superannuation often gets pushed down the priority list, as it involves a long-term financial plan for retirement, which is often much later down the track and a distant concern for workers. However, superannuation is a very important source of income once you stop working, and should be managed appropriately well before retirement to help ensure you're in a comfortable position financially when the time comes.
What is Super?
Superannuation, commonly known as super, is the money that is set aside over the course of your working life to provide for your retirement. Think of it as a long-term savings plan that provides you with a steady flow of income when you reach retirement age and are no longer able to work on a regular basis. The purpose of a superannuation fund is to provide you with a financial safety net that allows you to have a more comfortable retirement, than merely relying on the Age Pension and/or personal savings.
The money in your superannuation fund is accumulated through compulsory contributions made by your employer, known as Super Guarantee Contributions (SGC). Currently, the Super Guarantee Contribution rate stands at 9.5% of your salary or wages. According to the Australian Securities and Investments Commission (ASIC), the compulsory contribution rate for employers will gradually increase to 12% in the near future.
It is recommended that you also make voluntary contributions to your super fund, to supplement the compulsory contributions made by employers. This is because it will help to boost the amount you will have available for retirement.
The earlier you start with your contributions, the less you have to worry later on.
Super funds then take these contributions and invest them in various avenues, such as shares, property, fixed interest, cash, and so on. This is done in order to try and grow the super fund and maximise on the contributions that have been made. However, with the unpredictable and fluctuating nature of investments, losses may be incurred. For this reason, it is important that you choose an appropriate investment option.
Types of Investment Options
There are four main types of investment options:
The growth strategy involves the super fund investing a significant portion of your super (approximately 85%) into shares and/or property, to try and achieve high returns. The growth investment option also has the highest risk of loss associated with it, especially during less fruitful economic times.
The balanced investment option is slightly less risky, as it invests roughly 70% into shares and/or property, and the remainder in fixed interest or cash. The lowered risk also means that returns may be less in comparison to the growth investment option.
The conservative investment option takes an even safer approach by only investing 30% in shares or property, with most of the remaining portion being invested in fixed interest and cash. This helps to safeguard the fund against significant losses.
The cash investment option has the lowest level of volatility since the super fund only invests in deposits with local deposit-taking institutions or in a 'capital-guaranteed' life insurance policy. However, as it is the safest investment options, it also has the lowest level of return in the long-term.
When Can You Access Your Super?
The preservation age refers to the age, determined by the law and the fund's trust deed, at which you are able to retire and access your superannuation fund. The preservation age varies depending on when you were born (refer to the table below).
_ Image Source:_ Australian Tax Office
You can choose to get your superannuation paid out monthly, in a lump sum, or a combination of the two.
It is possible to access your super before you have reached your preservation/retirement age. However, to be eligible you must meet other conditions of release, such as:
- Severe financial hardship
- Permanent incapacity for employment
- Temporary incapacity for employment
- Compassionate grounds
For more information on the conditions of release, click here.
Types of Superannuation Funds
There are five broad categories of Superannuation Funds, they include:
Industry super funds were initially set up for employees that worked in specific industries, but now most of them are open to the general public. Typically, industry funds are accumulation funds and are relatively inexpensive.
They are not-for-profit, which means that all profits that are made are returned to the fund for the benefit of its members.
Retail superannuation funds are usually run by banks or investment companies. This type of superannuation fund is open to all and often offer a greater range of investment options. Retail funds are one of the more expensive options as they are run to serve the interests of shareholders, which is to make a profit.
Public Sector Funds
Public sector funds are superannuation funds set up for State and Federal government employees. They often have fewer investment options to accommodate to most member's needs and usually have lower fees than other super funds. Similarly to industry funds, public sector superannuation funds are run for the benefit of the members, so all profits are put back into the fund.
Corporate funds are super funds are organised by the employer for its employees. If funds are managed by the employer or an industry fund, all the profits are returned to the members. However, if the funds are run by a retail super fund, some profits will be retained. The cost of the fund usually depends on the size of the business. Super funds of larger corporations will typically have low to mid costs, while cost funds for small employers will usually be higher.
Self-Managed Super Funds (SMSF)
Self-managed funds, as the name suggests, are super funds that you run yourself. Instead of being in a pooled fund with other members that is run by another organisation, in an SMSF you are solely responsible for your super and the investments that are made. This type of fund is usually recommended for people who have a significant amount of super, a sound understanding of financial and legal matters concerning super, or simply want more control over where their retirement money is going.For more information on self-managed super funds, click here.
Which Super Fund Should You Go With?
So now that you know a little more about superannuation, the real question is: which super fund should you go with?
This decision requires careful consideration of a range of elements, such as personal factors, your situation, and what you want/expect from your super fund and retirement. These factors to consider and/or compare, include:
- Your age and the age you wish to retire
- Your income
- How much you currently have in your superannuation fund(s)
- The investment options they use
- Previous performance of the fund
- Extra benefits (such as additional contributions above the compulsory 9.5%, if you make voluntary super contributions)
There are a number of online tools available, that allow you to simultaneously compare a number of funds to determine which will be the best fit for you. It is vital you do some research and understand how each comparison website ranks the different super funds to determine the 'best' one. This will help ensure that the results also align with what you believe to be important. For example, one comparison website might value low fees, and another might base their comparison on the previous financial performance of the funds.
Click here for a list of helpful websites, that have been compiled by the Australian Securities and Investments Commission (ASIC), to help you compare the superannuation funds that are available in the market.
Having Multiple Active Super Funds
A common mistake that people make, is having too many super funds open. Usually, when people go from one employer to another, they take on the super fund of each one. This leads to individual employees owning more than one super fund at a time. Each super fund has its own fees and insurance premiums, which can significantly cut into your super. Consolidating your super funds will reduce the number of fees you'll have to pay in the long term.
Blindly Going With Your Employer's Super Fund
When you start working for an employer, they often present you with the default super fund of the company. It may seem like the easier option to just join this fund, however, you should do some research to make sure that it is the best one for you, before you sign on the dotted line.
Not Making Voluntary Contributions
Making voluntary contributions is highly recommended, as it will help to grow your 'nest egg' at a faster rate, which will provide you with a more comfortable retirement in the future. Also, the earlier you make contributions, the better.
If you are a worker looking for flexible work options, contact Workfast on our website or call 1300 824 403.