Looking to review your superannuation but don't know where to start?
Superannuation is a retirement benefit that an employer or a self-employed individual can assume. Generally, the employer pays 9.5% of basic wages as a superannuation contribution as required by the law. The company or employer is usually connected to an insurance agency that will keep the investment and where contributions are paid. Self employed individuals likewise can avail of their own choice of super fund since anyone who is in the workforce can choose any superannuation fund to undertake.
This guide will provide an overview of the different funds available and the steps you can take to find a suitable option for your needs.
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Key features of super funds
Super funds are designed to provide you with a tax effective means of saving towards your retirement years. They are also a way to ensure less retirees rely on the aged pension. In fact, by the time a person retires their super fund is usually among their biggest assets along with their home if they own one. Your super account is funded in a number of different ways and means, with the money being paid into the account being called a contribution or guarantee.
There are a number of different means through which money or contributions can be made to your super fund, and this includes:
- Money that is paid in by you: As long as you meet the eligibility criteria you will be able to make contributions to your super fund from pre-tax or post-tax dollars. It is also possible to transfer cash in other super funds although these are not strictly known as contributions as they are already part of a super fund.
- Money that is paid in by your employer: The law is that employers have to pay 9.5% of employees' annual salaries into their super funds, which is known as the superannuation guarantee. However, currently, if you earn less than $450 a month your employer doesn't have to pay you this superannuation guarantee.
- Money that is paid in by your partner: If you are aged under seventy, contributions can also be made into your super fund by your spouse.
- Money paid in by the government: Subject to eligibility, the government may add to your super fund under its co-contribution scheme based on after-tax personal contributions made by you and within specified limits. This is to encourage people to make contributions to their super fund.
There are a number of investment choices available when it comes to your super fund and you can choose how your fund is invested, with options such as property, shares, cash and fixed interest products such as bonds. One thing to bear in mind is that the reason why super funds are such a tax effective way to save towards your retirement is that super is taxed at rates much lower than the marginal tax rate, which is known as a concessional rate.
Another important thing to remember is that you cannot generally dip into the savings from your super fund until you reach the retirement age, currently 65. The idea behind this fund is that you have a comfortable nest egg with which to retire, so dipping into it every time you are short of cash would still run the risk of leaving you with little to no cash to fund your retirement.
Steps to compare your super fund options
- Get enough information about a super fund. It is fundamental to know all the options available for you. Getting sufficient information about the superannuation fund can help you make knowledgeable choices on which super fund is best for your specific needs. You can find wide information available in the internet with many websites offering expert and professional advice regarding superannuation. Look for online sites that offer impartial reviews to help you compare superannuation features and benefits.
- Look at the investment performance. One way to choose the appropriate super fund is to consider the investment performance. However, you need to take this approach cautiously as although it may seem to appear as a reliable indicator of future performance, it can be a trap to give you unreliable indicator with reference to a fund’s investment performance. It comes highly recommended to consider the comprehensive or diversified balance portfolio before selecting the fund which suits your needs. It is also wise to compare superannuation fund performance for over many years rather than just one or two. One way to get good performing fund is to look at the funds that the experts use. These super funds are most favoured even by several other superannuation consultancies.
- Get more value from your investment. Another consideration you should look into when searching for a super fund is the fees involved. You should know the charges and fees when selecting a fund. Higher fees can mean more services and features of superannuation fund available to you. Take a careful look on the features and benefits corresponding to each fee and determine whether you really need all of them otherwise you may forego some so you will be charged at a lower rate.
- Choose competitive insurance. When looking for a superannuation fund, you need to find one which is competitively priced. Settle for a super fund that gives you other featured benefits such for death, permanent disablement and income protection. With these, you can reduce your outright expenses since premiums are deducted from your super account.
- Seek advice from the experts if necessary. For you to choose the right super fund, you may seek advice from a financial adviser to help you design a strategy that you are comfortable with. Most super fund packages have financial planning advice integrated into their fees while others offer it for free. So if you only need simple investment, you can do away with paying extra for financial advice.
- Accessibility of the super fund. Super fund is a form of investment and as an investor you want to keep track of your money placement. When you compare superannuation, make sure to look into the accessibility of the fund to monitor the progress of your investment.
When am I eligible to start a super fund
At most, employers usually pay an amount equal to the minimum 9% of your income to your super fund. These contributions made before taxes are referred to as the Superfund Guarantee.
However, there are certain conditions which contributions to the Superfund Guarantee are not necessary. If you are one of the following, the terms and conditions apply to you.
- You have a monthly income of $450 or less every month.
- You are under 18 with a 30-hour or less work week.
- You are over 70 years old.
- You are engaged in domestic or private work for 30 hours or less every week.
Those who can freely choose a super fund must not be involved in any agreement or award. If involved in an agreement, the contract does not need superannuation fund support. You are eligible to choose your superannuation if fund is being paid through notional agreement preserving state award.
What types of super funds are there?
There are various types of super funds which can be put under two different categories – profit for member funds and retail superannuation funds. Although there are still debates going on which category is better, understanding them is much better since their advantages and disadvantages are relative to the needs that you have.
Retail superannuation funds
Also known as for profit funds, are managed by financial institutions and are open for investment to the general public. The following types of superannuation are under this category.
- Master Trusts – these are funds that are managed by a single corporate trustees and allow various companies and individuals to invest. Offered by banks and fund companies, it serves as an investment vehicle and is set up as personal super accounts. A Master Trust Fund has a lot of benefits ranging from disability to death insurance cover. However, these types of funds have a lot of unnecessary fees with it.
- Corporate Super Funds – are super fund options which are open to people working for a certain corporation. The benefits concurrent to these types of funds depend on the size of the corporation. And since these are limited to a certain corporation, membership is necessary to access the investment options under these funds.
- Retirement Savings Account – are funds that are similar to bank accounts except that they have certain limitations before accessing these accounts. These are considered low risk with lower fees. Moreover, death and disability coverage is also included. However, since these are low risk levels, they also offer low investment returns.
Profit for member funds
As the name suggests, these funds are available only for members or employers in certain industries. The types of funds under this category are self-managed funds, industry funds, and public sector funds.
These are multi-employer funds managed by groups through employer organisations and unions. These funds offer special services to different industry sectors, such as hospitality workers, retail workers, and builder.
All profits are given back to the members’ funds and involve lower fees. The disadvantage comes from the smaller possible options these types of funds bring.
Self managed funds
Often called as Do-It-Yourself funds, these are set up by an individual out of their superannuation account. Managing your own super gives you greater access and control as to how and where you should invest it. However, it could cost a lot managing these funds.
Public sector funds
These, as the name suggests, provide superannuation for those who are working in the public sector. They are somewhat similar in management and structure with industry funds.
When can superannuation be accessed?
Technically, your superannuation can only be accessed when you reach the preservation age which starts at 55 until 60. You can access it either as a lump sum or as an income stream. You also have the option to do it as a combination of both.
Although access is granted only upon the person’s preservation age, there are special cases where access is granted.
What are the benefits of investing your super?
Studies have further shown that 80% of Australians don’t really care how their super funds are to be invested; so what happens then is their super fund is set to a default mode by their employers – no risks, but earning little.
So if you are one who likes taking risks, then you might consider a growth investment strategy for your superannuation funds. However, this kind of strategy has more risks because of the market volatility; on the brighter side, it promises huge profits.
Where can I invest my super?
Now that the question of investing has been brought up, the next big question would be where to invest your super? Basically, there are four key asset classes or groups where you can invest your superannuation funds.
These assets are then divided into two subgroups – growth and defensive. Growth assets are those investments which involve a lot of risks but have a higher guaranteed return. On the other hand, defensive investments are low risk investments with lower returns.
The first two types of assets listed below are considered defensive investment assets and the last two are growth or high level investment assets.
- Cash. Cash are investments that could give investors easy access on their money when they need it. Bank accounts and cash management trusts are a few examples of cash investments. These are usually good if you are thinking of a short-term investment and have a low risk involved. But like all low risk investments, the returns are not that impressive when you think of it as a long-term investment.
- Fixed Interests. Like cash investments, fixed interests are low risk investments which could give you a fair enough return. Fixed interests are bonds given out by the Government, a company, or a public authority. If you buy a bond, you loan the money for a certain amount of time at a fixed rate.
- Shares. Also known as stocks or equities, these are high risks investments with also a guaranteed high return. Shares allow an investor to own a part of a company and give him the right to have a share in its future values and profits.
- Property. Property investments can be classified as a direct or indirect property investment. Buying real estate, such as houses, factories, or land developments are considered direct property investment; while investing in a securities property trust is considered indirect property investment. These kinds of investments are under the same league with shares because of its high risk and market volatility, but which can give the investor huge profits.
What are the risks of investing your super?
Aside from the asset risk listed above, there are other kinds of risks which you need to consider when you invest your superannuation.
- Interest rates. Though they affect each asset group differently, interest rates could affect your investments positively or negatively as they change.
- Currency. This risk would depend which part of the world you put your investments in. Currency risks may refer to the change of currency value of a certain country where your investments are. The risks come when the return of investment in foreign currency terms is put against the value of the Australian dollar.
- Inflation. The value of your money’s buying power can be diminished due to inflation. This kind of risk is more prevalent for those who invest much of their money in cash or fixed interest assets.
- Timing. Timing comes to play when to sell your assets. Timing could mean a gain or a loss when you sell your assets.
- Longevity. This comes to play when the question whether you will outlive your savings or not arises.
Whatever assets you invest your super funds there can be a number of potential risks involved. In order to lessen the risks, you have to diversify and determine your strategy.