Choice of Superannuation Funds
From 1 July 2005, about half of Australia’s employees are able to choose the superannuation fund into which their contributions are paid. The choice made could have a big effect on the type and amount of benefit available, and it is worthwhile considering the benefits available before a choice is made.
The first thing to consider is the type of benefit you currently have and the varieties of fund available. If the employee does not nominate a fund, the employer will pay the benefit into a default fund. Whilst all default funds (except “retirement savings account” funds) have to offer minimum age-based death insurance from 2007, much better insurance benefits may be available.
Types of benefits
There are two basic types of benefits: defined benefits and accumulation benefits.
The defined benefit fund pays a set benefit, usually a multiple of the worker’s annual salary, perhaps averaged over the three years before retirement on ceasing work. The worker has to have a considerable number of years of service before the full benefit is paid. If the worker leaves before the minimum number of years for a full benefit, the benefit is usually calculated on years of service and salary. This has the effect that the higher paid and longer serving employees benefit the most. The investment performance of the fund does not affect the benefit paid. The employer takes the risk of the investment performance of the fund.
Public service schemes and company schemes are often of this sort. The benefits are generous in comparison to the accumulation funds discussed below, and these schemes are becoming rarer. Advice should be taken before moving funds out of this sort of scheme.
The other sort of scheme, the accumulation fund, repays contributions together with whatever investment income has been obtained. This means that the final benefit paid depends on the amount originally contributed (less tax and administration fees) and whatever return the investment of that amount has produced for the time it has been in the fund. Obviously, the contributor (rather than the employer) takes the risk of poor investment performance, or that (for example) the share market is depressed at the time of retirement.
Varieties of superannuation funds
There is a variety of superannuation providers.
For many employees, their award or other agreement used to (but in many cases no longer does) require contributions to a particular fund. Often, this fund is controlled jointly by employers and unions, a so-called “industry fund” covering many employees in a particular industry. For example, the Construction and Building Unions Superannuation Fund (CBUS) covers workers in the building industry, although most funds are now trying to attract members outside their traditional base. These funds are generally run on a non-profit basis, so administration fees are usually low. Employers and unions are represented on the board of the trustee, which makes decisions about where the contributions are invested and what benefits are available to members.
In other cases, the employer has set up or arranged a particular fund for its employees, and the employer effectively provides the administration for the fund. Increasingly, employers are turning over such funds to professional administrators that charge commercial fees for administration. These are usually referred to as “company schemes”.
In other cases, the employer chooses a “master trust” type of arrangement, in which a large financial organisation, for example a life insurance company, sets up a commercial fund that can service many employers. Often, the fund is invested with the associated life insurer or by the associated funds manager.
Employees of the Commonwealth Government have their superannuation paid into the Commonwealth Superannuation Scheme, the Public Sector Superannuation Scheme or the PSS Accumulation Plan.
Employees of Tasmanian state government bodies have their own superannuation scheme. These have been much amalgamated and in some cases had benefits reduced in recent years. There is still a variety of schemes and benefits, such as the Emergency Services Superannuation Scheme and RBF. Some of these schemes are controlled by an Act of Parliament. Other schemes are controlled by a trust deed and a trustee.
There are also superannuation schemes available to individuals outside the employment context. Most large financial institutions provide a master fund type scheme in which the individual makes contributions to provide for their retirement to a commercial trustee who invests the funds. Banks and other institutions also provide retirement savings accounts that have the same function, although they seem to produce lower returns than others.
Individuals (usually self-employed people) can also set up private superannuation funds (the so-called DIY or self-managed super funds (SMSF) funds). In such a fund, each member has to be involved in the management of the fund, and there are strict limits on what can be done with the money. Such funds are not economically feasible if the amount of funds is less than about $250,000.
Features of superannuation funds
Usually, defined benefit schemes are much more generous than accumulation type schemes. Therefore, a person in a defined benefit scheme will usually be better off staying in such a scheme than shifting to any type of accumulation scheme.
If a person is already in an accumulation type fund, then there are probably four main things to consider before either deciding to stay in the current fund, or shifting to a new fund.
The first thing to consider is the investment performance of the fund. The main job of a superannuation trustee is to invest your money to generate strong consistent returns. It is dangerous to judge a fund only on the performance in the past year, so it is a good idea to look at the investment performance of the trustee over the past five or 10 years.
Take into account, also, that a variety of investment options are usually available to fund members. For example, there may be a conservative (capital stable) option, a balanced option and a growth option, depending on the member’s appetite for risk. So, it is worthwhile looking at the investment performance of the trustee in respect of each available option.
The second thing to consider is the fees and charges of the trustee. An average superannuation fund charges about 1.3% of the funds under management for investing and administering the fund. Some public sector funds charge less than 0.5%. Some funds charge 3%. Because “industry” funds and public sector funds are “not-for-profit”, the fees charged by these funds should, ordinarily, be lower than the fees charged by the funds run for profit.
The third thing to consider is the insurance benefits available. Death, disability and sometimes income protection benefits are some of the most significant benefits available in superannuation. It is generally cheaper to buy insurance through the superannuation fund because the fund can negotiate a cheaper price for volume. Often, insurance is available without reference to previous medical history. Look very carefully at the definition of “disability” in the insurance policy as this can be the difference between obtaining an insurance payout and the benefit being refused. Also, moving from one insurance policy to another can mean that the new insurer may require a health check.
The fourth thing to consider is the other type of services or benefits available. Some funds offer cheap home loans, financial products, newsletters or shopping and travel discounts.
Money in the fund
Generally, benefits paid are only taxed if the beneficiary is below 60 years of age. The tax rate (once above a certain threshold) is 15% less than the beneficiary’s marginal rate. This is in addition to the 15% tax on contributions. However, the tax on benefits paid is payable only on retirement or earlier payout of benefits.
Superannuation funds have the advantage that they pay tax of 15% on their income and 10% on their capital gains on assets held for 12 months. This means that money in superannuation should grow more quickly than money invested in a person’s own name, so long as the person is paying a marginal rate of tax above 15%.
A person’s tax file number must now be given to the superannuation fund in order to avoid being taxed at the top marginal rate.
At age 65, a person can take their superannuation benefits. Before that age, a person must satisfy a “condition of release” to take superannuation benefits. Between ages 60 and 65, resigning from a job is a condition of release. Between ages 55 and 60, ceasing full time work (10 hours per week) is a condition of release.
If you are below 55 years of age, see “Preservation” under “Superannuation Benefits“.