How to choose a super fund
There’s a lot of information out there to help you choose a super fund but most of it focuses on performance and fees. Sure, these are important, but we believe there’s a lot more to consider.
If you’re in a position to choose your own fund, here’s a run-down of what we think is important.
1. Where is your super now?
If you’ve got more than one super fund, or have lost track of your super, there are a few steps you should consider before you can chose a fund. Read our article on Consolidating super first then come back here.
2. How is your super managed?
Unless you have a self-managed super fund (SMSF), your super is usually managed by one or more professional investment managers who have been appointed by the super fund trustee.
In a managed fund, your super is pooled together with other fund members’ super balances and the investment manager buys and sells investments within each option on your behalf.
Under this arrangement, the super fund can offer you a range of investment options. The main difference between investment options is largely how much investment risk you are willing to take on.
An important way to manage your investment risk is to spread your money across different investments – this is called diversification.
A good super fund will offer you an extensive range of investment options you can use to diversify your investments, such as:
|Investment option||How the money is invested within the investment option|
The investment manager chooses a range of investments to fit within the asset classes which suit your tolerance of risk.For example, if you don’t like to see your investments rise and fall constantly it’s better to choose a conservative option that will remain steady because it largely invests in cash and fixed interest.
|Life stages||Very similar to risk profiles as it takes into account your tolerance for risk at certain stages of your life.|
For example if you’re 30 years old, your super could be invested aggressively in shares and property because you have about 30 years until you can access it, which is usually plenty of time to ride out the highs and lows of the investment markets, hopefully resulting in a better return.
|Asset classes||When talking about investments we group them into four main asset classes: cash, fixed interest, property and shares.|
You can invest solely in one asset class multiple times – for instance choosing to invest in retail, residential and commercial property. But this doesn’t provide you with the greatest diversification. Investing across a range of asset classes means the impact of ups and downs in any single asset class can be minimised.
|Specific sectors or indices||These provide you with the opportunity to invest in specific sectors such as small start-up companies or countries which are traditionally difficult to do on your own. For example, you might want to invest in Asia but don’t know which shares to buy – or how to go about it. |
Alternatively, you might not be able to pick or afford all the shares you like on the Australian Stock Exchange (ASX). Investing in an option such as the ASX 200 gives you access to the top 200 companies without having to outlay the equivalent cost or share broking considerations, for example.
|Preferred investment managers||Different investment managers adopt different styles like ‘value’ or ‘growth’. These styles perform differently at different times. Having a mix of investment managers in your portfolio can help smooth out your investment returns.|
Borrowing to invest is also called ‘gearing’ and aims to produce a larger investment return over the long term (7 years or more).
The downside is that if the market falls you could lose your entire investment. There are less risks associated with investing in a geared investment option such as not having to repay loans to the lender.
|‘Sustainable’ investments||It’s a type of investment discipline which considers the environment, social and ethical issues when making investments.|
You might only find one or two per fund and they go by names such as 'ethical', 'socially responsible' or 'socially responsive' – so look for these words if that’s what you’re after.
Mix and match
You should also be able to mix and match your investment options. For example, you might like to divide your super as: 25% socially responsible, 40% Australian shares and 35% global shares – hedged. This ensures your investments have diversification, particularly if you have other assets outside of super, such as an investment property.
A good starting point to find a super fund and its available investment options is via www.canstar.com.au.
3. What assets do you like?
If you want more shares and property there’s a few ways you can use your super do this. In order from easiest to hardest:
- Use a managed fund investment option tailored to a specific asset class or sector (as we explained earlier).
- Investing in a wrap or master trust (often referred to as a ‘platform’) gives you access to investment you wouldn’t otherwise have access to. For example, you can move your shares onto the platform and acquire more when you want. Because the assets stay in your name you can move them in and out without incurring capital gains tax and it’s helpful that the manager does all the administration work for you.
- As trustee of an SMSF you can decide which assets you want, within reason. For example, you can use your super to buy an investment property. But there’s a lot to consider before you do this and specialist advice should be sought as it can present problems if done incorrectly.
4. Borrowing money
Gearing super must be done under very strict conditions and options are limited. If you’re comfortable with the risks associated with gearing you can simply choose a geared investment option, if available, through your super fund.
f you have a SMSF, the options are a bit more complex. You can set up a limited recourse borrowing arrangement (LRBA) using your SMSF with specialist help. This means only the lender can get their hands on the asset, usually a residential or commercial property, if you fail to repay the loan. A new trust (structure that will own the asset) is created and officially owns the property, and the SMSF can usually take ownership when the loan is repaid.
If you’d like to know more about these complex arrangements check out the MoneySmart site.
5. What’s in your future?
Who knows! We do know this however – once you reach 65 you can get your hands on your super, regardless of whether you’ve retired. From that age you have a variety of choices:
- Leave your super there until you die
- Cash some or all of it out of super
- Use some or all of your super to start an income stream
So when choosing a super fund, it’s a good idea to think about what you might like in the future and whether it offers you these choices.
You should also review the investment options for income streams. For example, a ‘life stages’ option for those around age 65 invests more conservatively compared to younger ages, and is useful for protecting your first few years of income from super when you’ve retired.
6. Managing your own super
People close to retirement often think they will have sufficient time and expertise to have their own self-managed super fund (SMSF). You might feel ready now.
Having your own fund enables you to control things like investments and retirement benefits. If managed well, you could minimise tax and potentially pay lower fees than those charged by retail or industry funds.
If not managed well the opposite happens – its costs you more in time and money. There are also severe penalties for not doing the right thing, such as increased taxes and even imprisonment.
You can appoint some service providers to help you with the research and investment decisions but ultimately you’re legally responsible if anything goes wrong.
More information is available from the MoneySmart website.
7. Insurance needs
Most super funds offer insurance cover and it’s often cheaper than buying it separately through an insurance company, without having to undergo a medical check, so this should be the first place you look.
Before you do, note that some types of insurance can’t be held in super, such as trauma, so you’ll need to go through the insurer directly.
If you want a better understanding of why you’d have insurance in super read our article on: Life insurance, how to get what you need.
We see the headlines in the news about super funds having gone up or down in the past 12 months. Let’s get something clear: your super fund does not go up and down, it’s the assets (shares, property, commodities like gold etc) your super fund invests in that go up and down and affect generated returns.
The combined return of all the different assets your super fund invests in affects how much you have to retire on.
Since past performance is no guarantee of how a fund will perform in the future, you should consider:
- How your favourite funds have performed over a five year period (or longer if information is available). Remember that your super is locked away for a long time so there’s no point looking at investment returns over the last 12 months.
- If a fund consistently performs badly, it’s not likely to improve anytime soon unless it receives a complete makeover. Regardless of how attractive the investment options are, move on. That fund’s probably not right for you.
When comparing funds it’s important to compare like with like. For example, if you want 50% in shares and 50% in property, compare funds with similar investment options. It makes no sense to compare your chosen option against a fixed interest option as they’re completely different asset classes generating different returns.
9. Cost versus value
We saved this one for last because it should be your deciding factor. If you can’t decide between two different funds – go with the cheapest. This is because fees add up over time, reducing the amount you save by the time you retire.
If you want a wide variety of choice and like to make lots of changes, then be prepared to pay for it. Popular funds offering a wide range of choices are usually priced competitively – shop around using comparison sites like www.canstar.com.au.
Remember, if your needs are simple and you don’t want a lot of choice, you should consider a low-cost fund with simple features such as My Super. Read our article about Superannuation basics for information about this and other types of funds.
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