What is a retirement savings account?
Retirement savings accounts are not very common these days, however there are still a few available. Here's how retirement savings accounts work and how they compare to regular super funds.
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Retirement savings accounts are becoming increasingly rare, as the majority of Australians now open a superannuation account when they join the workforce. However, there are still some retirement savings accounts in the market, so this guide will outline how they work and how they compare to super funds.
What is a retirement savings account?
A retirement savings account is a type of account provided by a bank, building society, credit union or life insurance company. It's run in a similar way to a regular savings accounts, however it's designed for your retirement savings and you can't access the money until you're retired.
Typically a retirement savings account awards a higher rate of interest in comparison to a regular savings account, as the purpose of the account is to help you save for retirement. Once you've met a condition of release or reach your preservation age, you can start drawing down on your fund.
Not many banks offer retirement savings accounts anymore, since superannuation funds became compulsory for employees.
How is a retirement savings account different to a super fund?
Although they aren't superannuation accounts, retirement savings accounts do fall within superannuation regulations and the tax advantages that come with that. However with a retirement savings account even your tax-free portion can earn interest.
A super standard balanced or growth super fund will usually offer far higher returns than a retirement savings account. This is because super funds invest a large portion of your balance into shares, which are high return but also much higher risk.
Unlike the money in your super fund which is subject to the market performance, the money in your retirement savings account is covered by the bank guarantee scheme. While these accounts do sit within the superannuation regulations, they don't follow a trust structure, making it different from a superannuation fund.
Which bank's offer retirement savings accounts?
According to APRA, these banks still offer retirement savings accounts (as of July 2020). Some aren't open to new customers.
- Commonwealth Bank of Australia (closed to new customers)
- Qudos Mutual
- Queensland Country Credit Union
- Police and Nurses Limited
- Police Financial Services Limited(closed to new customers)
- Defence Bank Limited
- Heritage Bank Limited
- Australian Military Bank Ltd
What to look for in a retirement savings account
As we said earlier, there are very few retirement savings accounts available today. If you do want to open one, look for the following:
Competitive interest rate
A higher rate of interest will help your retirement savings work harder. This is especially true if it's compounded daily. However even with a high interest rate on your retirement savings account, you'll likely earn much better returns with a superannuation fund that is actively investing your balance.
To ensure that every dollar you deposit helps you save for your retirement, you should look for a retirement savings account that changes no account keeping fees and no annual fees.
Your retirement savings account provider should let you view your account details online or via a mobile banking app. Some service providers offer online tools that allow users to search for their lost super, which they can then transfer to their new accounts.
What are the pros and cons of using a retirement savings account?
- Less risk. A retirement savings account has much less risk than investing your super into a standard super fund.
- Tax advantages. A retirement savings account offers the same tax advantages as a superannuation account.
- No fees. Most retirement savings accounts do not charge any joining fees, ongoing account keeping fees, administration fees and commissions.
- Not that common anymore. Retirement savings accounts were initially introduced as a way to help Australians save for retirement, before everyone had a superannuation account. These accounts are becoming increasingly more redundant as the superannuation system matures.
- Low returns. These accounts will generate much lower returns on your money than other superannuation products. Even a conservative super fund option would likely deliver much better returns than a retirement savings account.
Tips for using a retirement savings account
Read the terms and conditions
Make sure you go through the product disclosure statement (PDS) before signing up for any retirement savings account. The summary page of this document should give you a clear indication of any applicable fees and charges.
Compare against super funds
Before opening a retirement savings account, compare similar accounts in the market to ensure you're finding the most suitable account for your needs. It's also important to compare these accounts against standard superannuation accounts. In particular, you can gauge how competitive the interest rate on your retirement savings account is when compared to the sorts of returns super funds typically deliver to their members. It is worth noting, however, that the return on funds invested into a standard super account is in no way guaranteed. Ultimately, it's up to you to decide the which strategy works best for you and your retirement plans.
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