Australia’s superannuation assets make up around $1.3 trillion today, however this figure is forecast to rise to around $7.7 trillion by 2032. If this holds true, our superannuation industry will grow dramatically from its current level of around the same size as Australia’s GDP to 3.5 times the size of the economy.
Superannuation is pegged to become a huge economic player, far bigger than the banks are now.
The tax paid by super funds is generally 15%, and already accounts for around 20% of each year’s Federal Budget.
In addition to tax, superannuation members pay around $17 billion in fees per year on their superannuation – but is this too much? High fees and low returns can have a significant impact on your balance in retirement. As with all long term investments, your super assets will likely experience the good returns, the bad returns and the ugly returns. Active management and regular reviews now can save you heartache later on, unless you like the idea of working until the age of 80!
The most common problem Australians face is the confusing and limited transparency super funds offer to members in regards to fees. Most of us put our super review in the “too hard basket” but what you really need to ask yourself is “can I afford to ignore this any longer?”
We will look at the types of funds you can possess and the fees associated with each as well as strategies you can adopt to maximise your super.
Types of Funds
There are five main types of superannuation funds:
1) Retail Superannuation Funds – these superannuation funds were developed by financial institutions and insurance companies to cater for people who were interested in investing and saving for their retirement.
It’s fair to say the initial focus of these funds were wealthier white collar customers typically in management positions. They offered investment expertise and personal service to their clients and charged a commission to provide that service. The funds were developed to generate revenue and profit for the financial institutions.
2) Industry Superannuation Funds – these superannuation funds are not for profit organisations.
When it comes to the products offered there can be considerable differences in the fees charged. Because industry funds are not for profit they generally charge lower fees. However, this is changing. Fees within industry funds are rising and at the same time their service levels are decreasing.
3) Corporate Superannuation Funds – these funds are generally only open to people working for a particular corporation. In some organisations membership is made available to ex-employees or relatives of existing employees.
By law, employers must offer a default super fund option for their employees as an alternative to exercising Choice of Fund rights for those who do not wish to choose their own super fund.
Corporate super funds can be set up through retail master trusts or in some cases, employers may choose to operate their own employer-sponsored super funds.
4) Public Sector Funds – these funds are only for public sector employees working in local government, the Commonwealth and State public services, public healthcare, and in Australia’s public universities.
5) Self Managed Superannuation Funds – these funds are also known as DIY super funds.
They can have up to four members and are generally established by an individual or a family and funded from their own superannuation savings.
Members of the fund must also be trustees, unless a corporate trustee is appointed, and are responsible for all the investment and compliance decisions of the fund, including administration, trusteeship and taxation.
Self Managed Superannuation Funds generally offer greater flexibility to its members than other types of superannuation funds. All investment decisions are made by the members of the fund, or their advisers, and members have access to a greater variety of products, transparency and strategies they can adopt.
The table below shows the average balance of each type of fund, and the current and forecast industry participation of each type of fund:
|Type of Fund
|Current Industry Participation
|Forecast Industry Participation for 2032
Self Managed Superannuation Funds are forecast to see the largest growth by 2032. These funds have become increasingly popular due to investors having greater control over their assets, the new borrowing rules within Self Managed Superannuation Funds which has enabled Funds to gear into property, and access to a wider range of strategies for retirement planning.
Types of Fees
The types of fees superannuation members are subject to are:
1) Establishment Fees – the fee to set up your super account. This can be anywhere between 0-5%.
2) Contribution/Entry Fees – these fees are charged on the money you contribute or rollover to the fund. When charged this fee can be as high as 5-7%.
3) Account Service Fees – these fees are charged by the super fund provider for asset administration, custody and trustee services, and so on. Usually charged around 1.5% for retail funds.
4) Member Fees – these are usually charged as flat dollar fees and known to be administration charges, policy fees, member fees and plan fees. These generally are around $1.50 per week ($78 pa).
5) Investment Fees – these fees are paid by the super fund to the investment providers and are usually around 0.7% for a balanced portfolio. These vary with the complexity of the asset.
6) Switching Fees – these are charged when you switch between investment options within your fund. These can be around $20-30 per switch.
7) Withdrawal Fees – charged when you want to withdraw or rollover your monies from your existing fund. These are usually a flat dollar fee around $50-100 per withdrawal but can also be a percentage of as high as 4-5%.
8) Adviser Service Fees – this is the fee charged by your financial adviser for the services they provide. These can be anywhere between 0.5-2% pa.
As you can see there are numerous fees payable for possessing a superannuation account. Most funds will have a combination of the above fees, if not all, and if you have more than one account you will be liable to pay fees on each and every account, as stipulated by the super fund manager.
No two funds are the same in their fee structure and transparency is hard to find. Most super fund members find it increasingly difficult to assess the actual fees they are paying per year and in most cases believe the level of service given does not warrant the fees charged.
We think the fees charged by a lot of superannuation funds, and some advisers, are outrageous! In light of this, we have designed our fee structure to sit at the lower end of the scale. Our fees are transparent, always discussed with you before work is performed and regularly reviewed to ensure that you are getting your money’s worth.
What can you do?
Regardless of the type of fund you have there will be fees. However, you can choose which fund you want to invest with and there are ways you can minimise your fees:
1) Consolidate – if you have more than one fund you are paying more than one fee set. By possessing a single superannuation fund you can avoid paying the same types of fees for various accounts. Consolidating your super also makes it easier for you to keep track of your super monies and makes light work of reporting.
You should be aware that, if you choose to rollout of a super fund, any personal insurance cover held in the fund will be lost. You should ensure that you have sufficient insurance cover in place elsewhere or arrange for replacement cover before exiting the fund.
There may also be exit fees associated with the rollover and you should find out about these before you act.
2) Do Your Research – look into the fees you are paying currently and then look at other funds suitable for your needs. There is a huge volume of superannuation funds out there offering competitive fee rates.
You should be mindful of the returns offered by funds also. These are far more important that the actual fees charged as you need to ensure that your superannuation assets are appropriately invested and earning a decent net rate of return.
3) Contact Us – we can do the leg work for you. We understand the trips and traps of superannuation funds and the industry as a whole and can provide advice on the options suitable for you.
Importantly, our initial consultation is free.