The most confusing aspect of superannuation is the fact that there are just so many to choose from. They all say how wonderful they are, how great your future will be if you choose them and how all the others are no good and if you’re with those others then you’re getting left behind.
Firstly, this isn’t true. It isn’t an outright lie but it certainly isn’t the outright truth.
Have you ever noticed how many shovels there are for sale at big hardware stores? There are all different shapes and sizes, different brand names, sales pitches and prices. What isn’t well advertised is that if you don’t know how to use the shovel then none of the features are going to matter one bit. The effectiveness of your shovel is limited by how well you can use it.
Super funds, like shovels, can only perform for you as well you’re able to use them.
So that you can use your super well, there are 4 essentials you should review: Structure, Suitability, Costs & Hangers-on.
Let me explain each:
There are two broad classes of superannuation – pooled and wraps – they relate to whether you can control what happens to the income ie dividends/distributions, rents & interest.
A pooled structure is where all income is automatically reinvested for you before you have the ability to choose what you want done with them. This is most suitable for those who are in accumulation phase.
A wrap structure is where you can opt for all income to be paid to a cash holding pool. This is most suitable for those who have regular fixed withdrawals coming out such as those made for retirees. It means that when (not if, but when) a market crash happens you won’t be forced to sell shares and property in the middle of the crash to fund regular withdrawals.
Any super fund has a mandate, called a trust deed, that states the intent and rules to be applied in the running of the fund. Of course, the law is the basis for these mandates and is common to every fund but once that groundwork is in place the super fund can work to build a fund that is suitable to the membership.
Some funds offer the ability to invest in direct Australian and international shares whilst others offer a more generic approach. Some will only invest in ethical investments, some offer a mix or let you choose the mix whilst some simply don’t care as long as there’s money to be made.
All funds must provide you a platform that’s in the best interests of helping you achieve your retirement income but many also offer online access, provide the ability for financial adviser access, attach educational platforms, give you automatic levels of life & disability insurance or operate an economy of scale so that your fees are most appropriate for the balance of your super fund.
I like to think of the analogy that super funds are similar to theatre houses. The stage is the provider – so the name of the fund, and the actors on the stage are the investment managers. Some theatres will have a stage manager, think financial adviser.
All theatres deliver the same essential product in the form of a play just as all super funds deliver the same essential product in the form of a savings vehicle.
The experience though can be different from one theatre to another as some have better quality seating, a different size theatre, nicer candy bar or even better parking. The actors on the stage could also be of very different quality depending on talent, education and experience.
Generally we all tend to believe that the higher the price for the ticket then we can expect a better outcome but with super funds it’s not always the case and often can be truly misleading.
A 1% total fee is the maximum that we stick to when recommending a super fund and this covers both Administration Fees (similar to the theatre fees) and Investment Fees (similar to the actors on the stage).
Be very careful of any passive fees that you don’t get value from or in many cases you haven’t even asked for. Historically there have been two hangers-on, shown to erode your precious retirement savings: Insurance and Financial Advice. Weird for me to say that right, given that I’m a financial adviser, however if you pay fees for something then you should get value from it.
If you have a financial advice fee getting debited and you don’t get advice from them then cancel it or call them and demand value. If you have life & disability insurance then work out if you need it or not (you don’t have to have it) and make sure you’re getting value for the premiums being deducted.
Every person has a unique view of the world that one day will lead to a truly unique retirement lifestyle. Just how unique, just how enjoyable and just what your experience will be like depends in large part on how much you have to retire on.
Letting others dictate to you their own preferences that don’t align to your goals or your values is a good way to give yourself a financial headache. But it can be easily avoided.
Remember, your four super essentials are:
Making sure your super fund is your best fit and working hardest for you is the groundwork we all need to do.