Are high fees eating away at your low superannuation balance? Here’s how to protect your super balance from fees.
Are you aware of all the fees that apply to your super account? For many Australians, a super is something you simply “set and forget”, with little attention paid to the effect that high fees can have on your super’s bottom line.
But the fees that apply to your super can make thousands of dollars of difference when you retire, and they can have a particularly significant effect on small super balances. Let’s take a closer look at how you can stop high super fees and management charges from eating away at your low balance.
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What fees apply to super?
There are several superannuation fees that may apply to your super account and which you should be aware of. You can see the full list of fees here, but some of the most important charges you should be aware of are:
- Member fees. These are general administration charges you must pay in order to keep your account.
- Investment management fees. Also referred to as Management Expense Ratios (MERs), these fees cover the cost of managing your investment. The amount charged is based on the investment option you choose and calculated as a percentage of your balance.
- Contribution fees. These fees cover the administrative costs your fund incurs when receiving and investing your super contributions.
- Insurance premiums. These cover the cost of insurance provided through your superannuation fund.
- Advisory fees. These fees are charged when you receive personal financial advice about your superannuation or other investments from your super fund.
Super fees and low account balances
If you’ve got a large super balance of tens of thousands of dollars or more, you may not notice the effect of ongoing fees on your retirement savings. However, it’s a different situation when you only have a minimal super balance, for example $5,000 or less. If you’re paying $300 or $400 in superannuation fees each year, this could counterbalance any investment returns you receive or even cause you to lose money and your balance to be whittled away.
This could especially be the case if you have a small super balance that is currently not receiving any ongoing contributions. For example, you could be an Australian citizen working overseas and therefore not receiving any contributions from your foreign employer into your Australian super account. Without regular contributions boosting your balance and your investment earning potential, you could find that the amount you pay in fees regularly outweighs your investment returns.
Is there any protection against fees?
Up until 30 June 2013, there were measures in place to protect super balances of less than $1,000 against super fund fees. These member protection rules ensured that for super accounts of less than $1,000 that contained Superannuation Guarantee contributions, the admin fees charged by a super fund could not exceed the investment return that account received in the same year by more than $10. Indirect fees and insurance premiums still applied.
However, these protection rules were scrapped when the then-Labor Government introduced its MySuper program in 2013, with the government claiming the new system was designed to protect fund members against unnecessary fees and charges. As part of the MySuper rules, all fund members who select a MySuper investment option must be charged fees on the same basis.
So, if you have a low super balance and your account is still receiving regular contributions, you will be charged the same fees as any other account, even if you suffer an investment loss.
What happens if my super doesn’t receive regular contributions?
Under superannuation legislation in Australia, in order for an account to be classed as “active” it must have received a super contribution within the past 12 months. Accounts that have not received a contribution from you or your employer in the previous 12 months are classed as “not active”.
Where things get even more complicated is if your balance is less than $4,000. Inactive accounts with less than $4,000 are automatically transferred to the ATO as lost super. This means that while you won’t be charged any fees, you also won’t receive any investment earnings. However, your balance will increase each year in line with the Consumer Price Index.
It’s also worth pointing out that these rules only applied to accounts of less than $4,000 from 1 January 2016:
- From December 2012 to December 2015, only inactive accounts with balances of less than $2,000 were sent to the ATO as lost super. Before this, the rules only applied to inactive accounts with less than $200.
- From 1 January 2017, only inactive accounts with a balance of less than $6,000 will be handed over to the ATO.
How to find out what fees apply to your super account
The best way to find out how fees are affecting your super balance is to check your member statement. This will clearly set out the amount you pay in fees each year and your investment returns, allowing you to form a clear picture of whether or not you are getting value for money.
If you’re not yet a member of a fund and you want to find out more about its fees, check the fund’s website or PDS; by law, your fund is required to clearly publicise all fees that will apply before you actually sign up for an account.
Fees and overall investment performance will vary depending on the super fund you choose, but if your fund is charging more than 1% of your total balance in fees every year (excluding insurance and taxes), you may be paying too much.
How to minimise super fees
1. Change funds
The simplest way to cut down on super fees is to choose a fund that charges minimal fees. It’s surprisingly quick and easy to compare fees online, so shop around to find a better deal.
Examine the fee structure of different funds, as member and administration fees could be charged as a flat annual rate or calculated as a percentage of your investment balance. There may even be a tiered fee structure in place, with lower percentages applied on higher balances, so it’s wise to regularly review how much you’re paying in super fees and whether there might be a better deal elsewhere.
The superannuation calculator on the Australian Securities and Investment Commission’s moneysmart website is also a very useful tool for calculating the effect that fees will have on your super balance when you retire.
2. Choose the right fund
Industry super funds, which are run to benefit members rather than shareholders, tend to charge lower fees than retail funds. Keep this in mind when comparing super funds, but remember that fee amounts and structures do vary between individual funds.
3. Consolidate lost super
As of 30 June 2016, ATO figures reveal that some 43% of Australians have more than one super account, which means almost half the population is paying unnecessary super fees. On the same date there were also a total of over 5.7 million lost and ATO-held superannuation accounts with a total value of just over $14 billion.
With this in mind, one of the key ways you can save on super fees is to consolidate your multiple super accounts into one account. Not only will this eliminate unnecessary fees (you will only have to pay fees on one account instead of on several accounts) but it could also help you boost your retirement savings with money you didn’t even know belonged to you. To check on your super, consolidate super accounts and find lost super, login to your myGov account.
4. Check your level of insurance cover
One of the largest expenses that can eat away at your super balance every year is insurance premiums. Most funds offer a variety of insurances as standard, including death cover, total and permanent disability and income protection insurance. Many funds offer a default level of insurance to members, so lowering the level of cover you have can reduce fees. It’s also a requirement for MySuper accounts to offer life insurance to members, so remember to opt out when you sign up for a new account.
In some cases, you may even be able to remove insurance cover from your super account altogether. However, be warned that if you’re thinking of purchasing similar cover outside of your super fund, it will often be more expensive (but may also provide a higher level of cover).
How to lower the costs associated with your SMSF
One of the benefits to having a self-managed super fund (SMSF) is having greater transparency around fees. It doesn’t cost you anything in member fees or contribution fees to maintain the fund, and you aren’t charged a fee for switching investments (apart from brokerage fees, that is).
However, the ongoing costs of managing your SMSF can quickly add up. You can read our guide on SMSF costs to get a complete picture of the types of expenses incurred.
There are some steps you can take to try and minimise the costs associated with your SMSF, including:
- Shopping around for the most competitive broker. If share trading is part of your investment strategy, be sure to compare the fees and services of a few different brokers, as these can vary quite dramatically. Premium offerings like live reporting, analysis tools and after hours customer service typically come with a higher price tag. Ensure you’re comfortable with what you’re getting for the rate you pay.
- Keeping your investment strategy in line with your experience. The cost of receiving quality professional investment advice can eat into a large portion of your fund’s return. Avoid excessively complex investment strategies and try to minimise the need for professional advice.
- Passive versus active investment strategies. An active investment strategy is one that's associated with a high degree of management and oversight. Because the strategy relies on more frequently buying and selling temporarily mis-priced stocks, it tends to lead to greater expenditure on things like brokerage fees and professional fund managers. By contrast, passive management strategies focus on making long-term gains by buying and holding equities, so tend to be associated with lower fees. Consider investing in passive vehicles such as ETFs or index funds.
It’s important to consider your personal financial goals and desired outcomes when considering how to minimise costs for your SMSF. If at all in doubt about the ability of your SMSF to meet those goals, it's best to seek professional advice from a financial planner.
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