Choosing the right superannuation fund for you | are super funds all the same?
Written by Glen James
Host of the Retire Right & money money money (formerly my millennial money) podcasts & author of The Quick-Start Guide to Investing.
Andrew from our Retire Right Facebook group asked a great question recently:
Hi, which is the best industry super fund to be in? Or are they pretty much all the same when it comes to returns?
The short answer is yes and no (I will explain 😉).
When this question is asked, usually what people really want to know is which superannuation provider they should choose so they can just move their cash there and happy days. Wouldn’t it be great if it were that simple! But you need to focus more on the assets underlying the portfolio you’re considering and how they align with your personal tolerance for risk and your timeline for accessing that money.
In my new investing book I touch on this as the superannuation industry is a little like the Wild West – the portfolios they advertise can be somewhat…misleading. Don’t get me wrong, superannuation is a fantastic structure to prepare wealth for our futures, but some of the terminology is a little wayward and I personally believe there should be more regulation surrounding the naming of the portfolios.
Let's use an example. I’m sure you’ve heard the term ‘balanced’ used in relation to portfolios that superannuation funds offer. The issue, however, is no two ‘balanced’ funds are the same. The balanced part refers to the mix of growth vs defensive assets they’ve built into the portfolio, but the percentage of each differs from fund to fund. Some have a split of 60% growth, and 40% defensive. The fund next door might be 70/30 or 80/20 – it’s inconsistent across the industry. And it doesn't exactly represent the idea of 'balanced', which most people would think of as 50/50.
To add some more confusion to this, each superannuation fund has slightly different definitions of what a growth or defensive asset is. If I was to unbox some of these funds the ways they have chosen to define the two is typically different. You see now why I want some more regulation?
What are we supposed to do about this? How do you choose a fund?
The first step is to define your tolerance for risk. How conservative or otherwise would you like to be with your investing in super? The second step is to think about when you’ll access the funds you’ve invested. The closer to retirement you get the more you might consider pulling back on a high growth option. BUT having said that, if you’re in your 60’s you still might need the funds invested for another 20 years! See how personal this situation is? Simply copying what someone else is doing with their superannuation is not the answer.
So, what do you do with all of this information? My first point would be don’t switch to someone else’s fund for "better returns" without doing some assessment first. Know your risk tolerance to determine your preferred blend of growth vs defensive assets. Think through when you might want to access the funds you’re investing in super – if you’ll be accessing the funds sooner, you might adjust the mix of assets. It comes down to you and your preferences. If you’re investing through superannuation in a ‘balanced’ portfolio, dig a little deeper. Even a phone call to your superannuation fund or logging into your online account can help you understand how your money is invested and why it is invested in that way. This is a great opportunity to be engaged with your superannuation and learn as you go.
Martin recorded an episode, 205 superannuation deep dive, which is well with a listen. It’s essentially a 101 on superannuation but the episode touches on some of what I’ve discussed in this email. Listen on Spotify or Apple Podcasts.
It’s because of these superannuation nuances that I encourage everyone to consider getting financial advice, especially if a third-party support person is something you value. Reach out if we can connect you to advisers we trust.
Community Question
Liz asks: My husband has two super accounts one that has had employer contributions going into and one that has only had non concessional contributions, different super providers. Does it matter which one we make a contribution to and be able to claim a tax deduction?
Glen: Firstly, it's ok to have as many superannuation accounts as you like.
I can see that your husband may have had the second account for after tax contributions to keep the tax components separate, which may be handy down the track with some estate planning considerations.
But if you are going to be putting a contribution into superannuation to claim a tax deduction, you would put it into the same fund that the employer has been paying funds into because it's the same tax treatment as the employer.
If you wanted to put money in and not claim it on tax, you would likely put it in the fund that he's set up for non-concessional contributions.
So, he's got two funds: one fund is 100% after tax contributions and one is pre-tax contributions. So yes, you can have as many funds as you like.
