What is a Superannuation Fund?
A Superannuation Fund is essentially a tax efficient investment vehicle that is used to save for the purposes of funding retirement.
Employers are obliged to pay money into Superannuation on behalf of their employees at a rate currently of 9.25%.
An individual may also contribute their own money into Superannuation (subject to contribution cap amounts) so as to increase their retirement pot.
The money is invested to make it grow. In most superannuation funds you can have a say over the type of investment and the balance between risk and return. For example, you may be able to choose to have your funds invested in local shares, property or fixed interest – or a mix of these and others.
However just like the share market and interest rates, the returns can vary and even be negative – so it is important to choose wisely (or take advice) so that your money is invested in accordance with your goals and objectives.
What are the different types of Super Funds?
The different types of Super Funds available are:
- Corporate Funds – These are where large companies have had a Super specifically designed for their employees;
- Public Sector Funds – These were created for employees of State and Federal Government departments;
- Industry Funds – These are not for profit funds originally designed for employees of specific industries but now the larger ones mostly being open to anyone. Generally low fee but limited investment choice.
- Retail Funds – These are run by financial institutions i.e Banks and Fund Managers and again are generally open to anyone. Range between low fee and limited investment choice through to Wraps with much wider investment options (a bit like a Self-Managed Super).
- Self-Managed Super Funds (SMSFs) – These are set up by individuals with up to 4 members, SMSFs are the fastest growing type of Super Funds in Australia. The general chain of though for Self-Managing is that a minimum balance of $250,000 is required (also note that there is a lot of responsibility and compliance attached in running an SMSF).
How do I choose a Super Fund?
Sometimes you may not have a choice for example if you work for the government or you may only have a limited choice if you work for a large corporation but in the main most people can elect to choose a Super Fund.
If you are able to choose then you really want to think about what you are looking for in a Fund and the different types of features and benefits you wish to use.
For example if you are only just starting out or only have a negligible balance and do not wish to use your Fund for comprehensive insurance cover then a low fee low investment option Super may be appropriate.
If you are looking for a Super Fund that has comprehensive insurance cover available then perhaps a Retail Fund would be more appropriate.
If you have a larger balance or are a sophisticated investor or wish to look at investing directly into assets like shares and currency etc then you may wish to consider a Retail Fund like a Wrap or if you are happy to take on the extra responsibility maybe a Self-Managed Super Fund.
Spending time to research the different types of funds available will be well worthwhile also consider using a Financial Planner to work with you to help you make the decision.
Where is the money invested?
This will depend on the type of super fund you are in and the investment options offered/chosen.
Most of the lower fee lower investment choice funds will have a range of pre-mixed asset funds for example:
- High Growth
The more invested towards Cash and Bonds the more stable (less risk) your investment will be i.e Conservative and Moderate Funds but generally lower returns over the longer term.
The more invested towards Shares and Property the more volatile (more risk) your investment will be i.e Growth and High Growth Funds but generally produces higher returns over the longer term.
However not all pre-mixed funds are the same for example Super Fund A may have a Balanced option with 50% towards shares whereas the Balanced option with Super Fund B has around 70%!!
Getting the allocation right is essential as it needs to be somewhere you are comfortable with and that is able to meet your goals.
If you have a larger balance you may want explore a Fund that has more options and so that your money is invested across a large range of fund managers and/or to buy shares directly, this generally takes more knowledge and is therefore for investors with experience alternatively consider utilising a Financial Planner that can recommend a tailored investment portfolio.
Remember that yes lower fees can help increase the end result of your monies however the biggest factor is the net return you are achieving on your money, net meaning after fees and taxes (Super is taxed at 10% - 15% on earnings).
Using comparison websites can help and here are a few:
Although ensure that you are comparing like for like, for example Super Fund A’s Balanced option may be more aligned to Super Fund B’s Growth option so you are not comparing accurately.
Also consider the longer term picture, say 3 or 5 years rather than just choosing the best performer from last year.
Remember that these websites do generally only measure the big funds and generally only the default pre-mixed options.
Therefore there may be a fund comparison between Fund A that has only 1 Balanced option, obviously there default option which has achieved 9% and Fund B which has 5 Balanced options from different fund managers whose default Balanced option has only returned 8%.
Fund A in this case rates higher however Fund B’s other 4 Balanced options (not compared) all achieved 10% or higher.
Lastly, do not set and forget, a regular review of your Super Fund and its appropriateness to your situation as well as your investment asset allocation is justified, this is where most people approaching retirement were burnt when the Global Financial crisis hit (GFC).