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financial advice Brisbane

Super Fund Check List

Written by Kris Wrenn

Are you confident that you know exactly how your Super is structured and whether it is working effectively for you? If not, this step-by-step guide is essential for you. Why? Because if you get it right early on, it can make an incredible difference to how comfortable your eventual retirement. It can also protect yourself and/or your loved ones in the event anything happens to you.

You can review your Superannuation by following the below steps.

By the time you have finished you’ll understand how your Super is working for you, what the related costs our, what insurances you have in place and what happens to your Super if you die.

STEP 1 – Check your funds fees and charges.

It is important to know that some fees will be % based and some $ based. Some will be “direct” so you will see them in your transaction history. Others will be “indirect” and are reflected each day in the changing unit price of whatever you are invested in. It helps if you can calculate what the overall % fees based on your balance today. That way you can compare this overall fee with other platforms / investment options. Your ongoing fees might work out as low as 0.5% p/a, or as high as 2.5% p/a.

There are a few ways you can calculate your ongoing fees. You can:

  • call your Super fund and ask them to break down all fees and charges.
  • read the applicable Product Disclosure Guide, or
  • check your annual statement. At the start of your statement it will have the starting and closing balance. Calculate your average balance throughout the year by adding these together and dividing by two. At the end of the statement there should be a total of all fees and charges. (Make sure this doesn’t include insurance fees). Take this figure and divide it by the average balance, then multiple by 100. This will give you an approximate guide to your annual fees in % terms.

Most Balanced or Growth funds inside Industry Super funds charge between 0.5% and 1% p/a. Master trusts like Colonial First State, AMP or BT can differ significantly depending on the investment options that were selected. If aggressive options like “geared share” funds are used, fees might be as high as 4% or 5% p/a. If a range of (passively managed) “Index Funds” are used ongoing fees could be as low as 0.3% or 0.4% p/a.

In summary, if you are not receiving advice on your Super, ideally you definitely want your ongoing % based fees to be under 1% p/a.

For more information about reading a PDS and comparing fees follow the below links:

https://www.superguide.com.au/comparing-super-funds/how-to-read-a-super-fund-pds

https://www.superguide.com.au/comparing-super-funds/feeding-frenzy-super-fund-fees

https://www.superguide.com.au/comparing-super-funds/super-pension-lowest-fees

STEP 2 – Check how you are invested.

It is just as important to know how your money is invested. The reason for this is that paying higher fees can be justified if the returns justify it. Generally speaking, more aggressive fund options tend to have a higher fee, but also tend to outperform less aggressive options in the long-term.

A figure that you can seek to calculate is your “Growth to Defensive ratio”. Your growth exposure is made up all money invested in shares, property and infrastructure. Your defensive exposure is made up of Cash, Bonds and other “fixed interest” exposure, such as debt/credit securities.

So for example, if 80% of your money is invested in shares and 20% in Cash you would have an 80% Growth to Defensive Ratio.

Most end of year Super statements will show your “Growth Vs Defensive” exposure.

If you have a long time to retirement (10, 15, 20 years+), it is not uncommon for people to have a very high growth to defensive ratio, possibly even 100%, because the argument is that they have the time to ride out short term volatility.

Your level of growth assets should also be dependent on your particular preference to risk. If you are risk averse and/or if you do not want to see large fluctuations in your balance, then you might consider reducing your level of growth assets. However, you must understand that in the long-term this will likely reduce your potential returns. Learn more about risk here:

https://www.superguide.com.au/comparing-super-funds/risk-profiling-investment-choice

STEP 3 – Consider making additional contributions to Super.

This is very important because the more you contribute to Super throughout your life, the more your balance will compound. i.e. You will make returns on the returns and the effect is like a snowball rolling down a hill.

Key Point to note – There are two completely different types of contributions you can make to Super; Concessional and Non-Concessional.

Concessional contributions

These are pre-tax, made up of Employer, Salary sacrifice and Personal concessional. The limit on these is quite small, at just $30,000 p/a.

Example of a strategy – Let’s say a person earns $80,000 a year. As such their employer would be contributing around $9,000 a year, well short of the $30,000 limit. This person could choose to contribute an extra concessional contribution of $10,000 (either periodically throughout the year or all in one go), taking their total contributions to around $19,000. The $10,000 they contribute would reduce their taxable income by $10,000, saving them $3,200 in income tax (+Medicare). The Super fund would take 15% contributions tax, or $1,500, so the net tax saving would be $1,700.

Important point – you must submit a “Notice of Intent” form to your Super fund to ensure the contribution is treated as concessional.

Non-concessional contributions

These are contributions from “after tax money”. They do not have the same tax benefit as concessional. Accordingly, the limit on these contributions is much larger at $120,000 p/a. These contributions are more commonly made by older people (perhaps in their 50s or 60s) in an attempt to build up their Super before retirement.

There is one exception to this – those that are trying to benefit from the Government Co-contribution. This is whereby low income earns can make a non-concessional contribution up to $1,000 and be rewarded with a payment from the Government of up to $500, an effective 50% return on your money. However, you must have earned some employment income at some stage though out the financial year and your total income must be below $60,400 p/a. If it is between $45,400 and $60,400 you can receive a partial benefit.

STEP 4 – Consider making changes to your Super.

You might consider changing the investment mix within your current Super, or you might consider changing Super platform completely.

You might make a change because you think the fees are too high (see step 1). Or you might make a change because you feel the investment mix is not appropriate to you (see step 2).

It is important to consider all options –

  • Industry Super (Australian Super, CBUS, Rest, etc)
  • Master Trust (Colonial, BT, AMP, Mercer, etc.)
  • Wrap account (Asgard, BT, Colonial etc.)
  • Self-Managed Super fund.

STEP 5 – Consider insurance inside your Super.

Anyone who has opened a default Super fund through an employer may well have an insurance policy inside and perhaps don’t even realise it. This might be:

  • Life Insurance (paid to a beneficiary upon death)
  • Total and Permanent Disability, TPD (Paid to the client upon being deemed totally and permanently disabled).
  • Income Protection (a monthly income provided if they are injured or sick and cannot work).

If you have any of these insurances think about whether the benefit level is enough for you. Will it be enough to wipe your mortgage … will it be enough to provide enough income to you or your loved ones.

If you do not currently have any of these insurances, you could consider applying for them.

It is important to know that there are advantaged and disadvantages of insurance policies.

Advantages – insurance policies provided by the Super fund are generally (but not always) lower cost than policies outside Super. They are also generally easier to obtain (less paperwork).

Disadvantages – generally speaking you/your beneficiaries tend to pay more tax on the benefits. The conditions of the policies tend to be less advantageous. For example;

  • with TPD the policy will be “Any occupation” meaning you need to prove you cannot perform any job. Outside Super you can have an “Own occupation” policy, meaning you only have to prove you cannot do your
  • with Income Protection, policies will often have a longer waiting period such as 90 days (so you need to be out of work for 3 months before it starts paying) and almost always has a shorter benefit period, with most paying for just 2 years. With a policy outside Super you can be paid an income for potentially 30 or 40 years depending on your age.

STEP 6 – Consider naming a beneficiary.

You can, and should, name a beneficiary to receive your Super in the event of your death. Generally speaking, your Super can only be left to a;

  • Spouse
  • Child
  • Financial Dependent
  • Personal Legal Representative (to be distributed as per your Will)

If you choose one of the top three, then in theory your Super does NOT form part of your estate.

Is there tax to pay on this “inheritance”? In theory, YES. If you die and your spouse inherits your Super, they do not pay any tax. The same goes if it goes to a child under age 18. However, if your adult children inherit your Super, they will pay tax of 17% on the taxable component. The taxable component is made up of all employer and other concessional contributions, so for most almost all of their Super is made up taxable component.

This means your adult children could pay tens of thousands of dollars in tax.

 

 

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