Getting the most from your super fund

Your superannuation fund is most likely the biggest asset you have next to your own home.  But we find most people in their 20’s to 50’s take very little interest in their Super fund, and often aren’t even sure what super fund they have.  We think this lack of interest is due to a couple of reasons:
  • You don’t actively invest in your super, it is just something your employer pays into.
  • Why worry about something you can’t access until you retire – that is years away

However, if you pay your super some attention it can make a difference to your lifestyle in retirement.  The earlier you start the better, but no matter when you start to take notice, it will make a difference.  Below are a few ways you can get the most from your super fund. 

MAKE SURE YOUR EMPLOYER IS PAYING YOUR SUPER

Do you actually know if your Employer is paying your Super contributions into your super fund?  Have you checked your latest statement?  

It is amazing how many times we have discovered that a client’s employer either isn’t making any contributions or has missed a few.  As an employee you are entitled to have your Employer make contributions into Super for your future retirement.  If this isn’t happening then you need to rectify this with your Employer, or in some cases you may need to report them to the ATO.  Not only have you missed out on the contributions, but you will have missed out on the earnings too.  

If you are self-employed then you have to make your own super contributions.  We know a lot of self-employed people don’t contribute to super for a number of reasons.  But why not just start with an amount that you can do on a regular basis and as cashflow improves then increase the amount.  In 10 years you will be very happy you took that first step.

WHERE IS YOUR SUPER?

We have seen many clients over the years who aren’t exactly sure where their super is, or how many super accounts they have.  Having multiple super funds can easily happen as new employers can open a super fund for you each time you start a new job.  But this just means you are paying multiple fees which can eat away at your account balances.

If you have a MyGov account and have linked this to the ATO you should be able to see all the super funds you have as they are linked using your Tax File Number.  You will then be able to easily consolidate your super into your chosen fund using your MyGov account.

CHOOSING A SUPER FUND

So how do you choose the Super Fund that suits you.  Most people don’t make an informed choice but just end up with the one opened for them by their Employer.

But this is your money, and even though you can’t access it until you retire, it is still your money.  So shouldn’t you have a say in which super fund is used, and how those funds are invested.

A lot of people automatically think that the super fund with the lowest fees is the best one to use.  And yes, fees are definitely an important factor, but so is choosing how your super is invested.

All super is invested in the share market.  What varies is the percentage allocated to the share market, which we call ‘Growth assets’, compared to the percentage allocated to Defensive assets like cash and fixed interest.

Sometimes this split between Growth and Defensive assets is chosen by the Trustee of your Super Fund based solely on your age.  These funds will have a high percentage of your funds invested in Growth when you are young and as you age this percentage will reduce.  You don’t have any choice in this investment allocation as it is done by the Trustee.

Other funds will just invest you into their ‘Default’ option and this varies from super fund to super fund.  One fund sets their Default option as high as 80% in Growth assets and 20% in Defensive, yet we have seen other funds have a 50/50 split with others somewhere in between.  Again, you don’t have any choice in this investment allocation if you are invested in their Default option.

If you want to take a more active role and choose how much of your super is invested in the share market, then you need to understand your capacity to take financial risk.   The easiest way to do this is to have a chat with a financial adviser, but if you want to work it out yourself then you could consider the following points:

  • Time.  If you are young, you have time on your side, and you should be able to ride out share market volatility.  
  • Access to funds.  If you are getting close to retirement, then you might be more concerned about preserving the super you have now.
  • Sensitive to Loss.  If you panic or feel very nervous when you hear the share market has gone down, then maybe you should avoid too much risk.  

As Benjamin Franklin said many years ago “an investment in knowledge pays the best interest”.  In other words when it comes to investing your super, nothing will pay off more than educating yourself.  Do the necessary research and analysis and speak to a financial adviser, before making any investment decisions. 

PERFORMANCE

Choosing a super fund solely on performance is fraught with danger.  First and foremost, past performance does not guarantee future performance.  Secondly, trying to compare Fund A with Fund B is not easy as you need to understand the investment allocation of Fund A compared to Fund B.

With the share market having had a very good 12 months, it follows that a fund that had a higher allocation to the share market in the last 12 months will outperform a fund that had a lower allocation.  So, make sure you understand the asset allocation of each fund you are comparing to ensure you are comparing apples with apples rather than apples v oranges.  But also keep in mind my opening statement that past performance does not guarantee future performance. 

Another thing to check is if the performance figures they are advertising is before or after fees.  The figures before they take out fees will obviously be higher than after the fees have been paid.

MAKING ADDITIONAL CONTRIBUTIONS

Once you have chosen a fund and selected how it should be invested, it is time to make it grow.  If you are an employee, then you will already be receiving employer super contributions.  You can also make additional personal contributions.

The easiest way to do this is through your Employer by asking them to take some of your salary and put it into your super fund, instead of your bank account.  This is called Salary Sacrificing as you are literally sacrificing some of your take home pay to put it into super.  This is called a concessional contribution, and in this financial year this is limited to $27,500, but it also includes the amount your Employer contributes. See the example below

Salary: $70,000

Employer Super Contribution: 10% – $7,000

Amount available to 

salary sacrifice: $27,500 – $7,000 = $20,500

One of the benefits of salary sacrifice is that it can help boost your super balance, but these contributions can also help reduce your personal tax liability.  

You are also able to add another $110,000 per annum to your super.  These contributions are called Non-Concessional but are not able to reduce your personal tax liability.

If you are self-employed then you can make personal contributions to your super fund, and then at the end of the financial year your Accountant can work out the best way to treat these contributions.  (ie. Claim a tax deduction for them to reduce your personal tax)

Tip: Make sure you chat with your Accountant or Financial Adviser to ensure you choose the best way to contribute to super to suit your particular circumstances.

UNDERSTAND THE POWER OF COMPOUND INTEREST

Compound interest is just interest paid on money invested, plus the interest you have already earned on this money.

See the example below for a simple bank account:

Bank Account Balance: $5,000

Interest Rate: 5% (I wish interest rates were this high!)

Interest Received: $250

New Account Balance $5,250

Interest Rate: 5%

Interest Received: $262.50

In this scenario you can see that the interest received in Year 1 ($250) is added to the balance and then interest in Year 2 is paid on both the initial deposit and the interest received.  Essentially you are receiving interest on interest!

If you take this same scenario and apply it to your super balance you can see how this can help your super grow.  The funds that your super is invested in will return a dividend or distribution which is similar to interest.  This distribution is added to the value of the super and then it is invested again and another distribution is received and reinvested.  Just like the example above of a simple bank account, but with bigger numbers.

By making small contributions to your super fund over a long period of time, this can improve the balance when you retire.  The higher the balance at retirement the more comfortable retirement you will have.

SPOUSE CONTRIBUTIONS

If you are earning more money than your spouse/partner and would like to top up their super you could consider making spouse contributions.  If eligible (and you need to make sure you are eligible before doing this) you can generally make a contribution to your spouse’s super fund and claim a tax offset of up to $3,000.

This way you can top up your spouse’s super and get a tax offset for doing so! 

INSURANCE

Do you have insurance in your super fund?  We see a lot of clients who don’t realise they have default insurance in their super fund.  They also sometimes don’t realise that the premiums for this insurance is being deducted from their super balance.

Having insurance in your super is not a bad idea as it is often a cost-effective way of paying for insurance premiums.  But make sure you know how much you have and what it is costing you as premiums will reduce your super balance over time.

If you do choose to have insurance paid from your super fund, then making additional contributions to super will help offset the premiums.

A FINAL WORD

Superannuation is probably going to play a major part in your retirement, so it’s important to educate yourself on all of the things mentioned in this article.  There are numerous articles, commentaries and reviews about super online for you to research, but if that sounds all too hard and or gets too confusing, then please feel free to get in touch.  Olivia and I help clients with these choices, and more, every day.  We can help you get the right foundations in place and you take it from there, or we can provide ongoing support as you transition through the different stages of your life.  As we say One Life….make the most of it. 

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