“I want to ensure that my superannuation is helping me head towards a comfortable retirement. Could you explain the benefits and drawbacks of different types of super funds, and how I can choose the one that's best suited to my retirement goals?"
-Question from Noah in Fremantle, Western Australia
Top answer provided by:
Kelly Mitchell
Hi Noah,
Great question. As an adviser I get asked more often than not “what’s the best super fund” and its not a simple answer.
Choosing the right fund will depend on key factors such as how you want your balance invested, whether you require an income stream for retirement or personal insurance cover - and importantly - whether you want to play an active role with the management of your super.
This will vary from one person to the next and deciding which fund best suits your retirement goals depends on what your overall retirement goals are. An important question to think about at this point is also whether you are on track to having enough super at retirement to meet your retirement goals.
There are several types of super funds out there, but the most noteworthy types are often described as ‘Industry’ Funds, ‘Retail/Choice’ Funds, Self-Managed Funds and ‘Defined Benefit’ funds. Each one has its own pros and cons, but they are all essentially governed by the same rules such as when you can access your money, the tax treatment of contributions and associated earnings, and their reporting obligations. Some funds offer limited investment choices, while others have a broader range of options.
Here is a brief breakdown by super fund type:
Industry funds
The most frequently discussed are the ‘Industry’ funds. Because these funds are supported by unions and/or specific industries and have a lot of marketing campaigns about their performance there is often an assumption that these funds must be the best.
The advantage of industry funds are:
-where you are seeking low cost
-simple pre-mixed investments
-basic administration needs
-flexibility to adjust your retirement income withdrawals as needed
The disadvantages are;
-lack of personalisation which may not suit sophisticated investors
-may lack control over the tax consequences of the investment decisions made by the Asset Managers/fund
-may lack the ability to make strategic changes to your super
-if you seek specific industry or asset types you may find your choices restricted.
Retail/Choice funds
These funds generally have a wider range of investments options and so offer flexibility to tailor your portfolio. They are much more competitive in today’s market when it comes to their fees and costs and performance will appear to vary more significantly than industry funds due to the wider range of investment choices available.
The advantages are;
-wider investment choice - Investment options that better suit your preferences, or risk appetite
-may offer more control over the tax outcomes of investments through ‘wrap structures’ that aren’t available via industry funds
-more flexibility and control of making strategic changes to your super
-flexibility to adjust your retirement income withdrawals as needed
Disadvantages are;
-they require a bit more active decision making
-some retail funds charge higher administration costs than industry funds
Self-Managed Super funds
These funds are most effectively used by individuals seeking greater control over investments that are willing to actively manager their super.
The advantages are;
-wider investment choice, ability to hold direct residential or commercial property
-more control over the tax outcomes of investments
-flexibility to adjust your retirement income withdrawals as needed
Disadvantages are;
-high administrative burden
-requires some financial expertise or need to outsource this arrangement (making it less cost effective than some other options).
Defined Benefit funds.
They generally provide retirement benefits based on factors such as years of service and final average salary, and in some cases offer lifetime income streams as an alternative to a lump sum super balance.
The advantages are;
-they may offer some lifetime income streams at retirement that are guaranteed and generally calculated based on a formula and not market linked investments
-they are often formula based and inflation linked meaning they adjust the value with increasing CPI, years of service and average salary.
-values are not impacted by markets but they may also offer some portion of market linked investment when making additional contributions.
Disadvantages are;
-can only be access through certain employment arrangements
-terms and specific plan are predefined by the employer which may not suit everyone
-limited choice – generally cannot customise your investment strategy
-draw down options at retirement may be limited and you may not have flexibility to adjust your income withdrawals as needed.
All funds vary in terms of performance and past performance is no guarantee of future performance. If you are however comparing the returns of 2 of more funds you should seek to understand a) what those funds are invested in and b) the amount of risk involved in those underlying funds.
Conclusion
Noah, to conclude, the best approach to choosing the right fund is to first evaluate your needs, your risk tolerance, and investment goals, to make an informed decision.
Remember, your choice of fund isn’t permanent. If you’re unhappy, you can switch funds!
But having enough super to meet your retirement goals should rank high in importance when thinking about super generally.
A qualified financial adviser will possess the knowledge of the superannuation landscape including various fund types. They can help you make informed decisions to choose a fund that aligns to your retirement goals and will take into consideration factors such as your age, risk tolerance, income needs and retirement aspirations.
All the best,
Kelly
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