Superannuation is an investment which operates by putting aside money during your working life so you have savings upon retirement. Your money gradually builds up because once it is in a super fund, generally it must remain in a super fund until you reach a minimum age set by the Government and meet the rules for accessing the benefit. By law, most working Australians generally have 9% of their salary paid by their employer into superannuation. Some employers choose to contribute more than this amount for their employees as a form of added remuneration.
Many employees also choose to put money into super themselves either from their after-tax income, or they arrange with their employer to take home less money and have some of their salary put pre-tax into superannuation, known as salary sacrifice.
Superannuation is not compulsory for self-employed people, although many do make contributions.
1. Types of funds:
Each type of super fund can tend to have its own traits which some might perceive as strengths and others as weaknesses. For example, a Self Managed Super Fund to one person might offer autonomy and greater investment flexibility, but to another person, the responsibilities and risks of running a fund might be far too onerous.
A retail fund might seem to one person to have too many investment options, while another person sees the fund as particularly attractive because it might provide unique services and flexibility.
2. Product features:
Compare the sorts of product features provided by the fund and decide which features are important to you. For example, you might want a fund that offers attractive retirement income stream options through pension products.
3. Investment options:
Compare the investment options available in the fund. What sort of investment option suits your risk profile? How much flexibility do you want to change your investment choice, tailor your options or blend options? For example, you may want to be quite selective with your investments and have more of your super in a certain asset class, such as Australian shares. This is important if you have other investments as it will help you diversify your investments. Some funds give a lot more choice than others.
Check whether your employer will contribute more to one particular fund or offer higher benefits in one fund. Check whether you can take advantage of the Governments Super Co-contribution initiative.
Compare the insurance cover offered by the fund. Does the fund provide automatic acceptance insurance cover up to a certain level? What does it cover you for and at what cost? If you change funds or no longer have an employer contributing on your behalf, what does this mean for your insurance cover? You wouldnt want to find yourself without cover.
6. Fees and costs:
There will be a variety of potential fees and charges in each fund. Consider things like the annual administration fee, investment management fees and other fees, such as expense and service fees, which may be payable by you if you want to change investment options, transfer to another fund or roll-over to another super fund and terminate your membership with your current fund. Super funds must show all significant fees in a table in the funds Product Disclosure Statement (PDS).
7. Investment performance:
Since superannuation is a long-term investment, you should examine investment performance over at least a five year time frame. Look at what sort of track record the fund has, although keep in mind that past performance is no guarantee of future performance.
Information courtesy of the Financial Planning Association.
At Vaughan and Monaghan we can help you understand which superannuation choice is right for you.