Superannuation

[Darky]

What's the best way to decide which is the most suitable superannuation fund for an individual?

I've held a few full time jobs, and several long-term agency jobs over my 8 years in the workforce, and my allotments of super are spread far and wide across at least half a dozen accounts.

I keep hearing how combining all these accounts into one is a money-saver and yeah it makes sense, but what are the indicators for picking an account?

And what should one make of AMP's turmoil a few months ago? I've only got a very small amount in an AMP super fund, so it's not a huge risk to me if I keep it there, but how does one weigh up AMP's recent finanical turmoil against it's high profile history as a leading agent for superannuation?

If rolling the lot over into one account, what should I look for in the designated account?

 

[ozzult]

Personally I look for the one with the lowest fees, a reputable company, and also the ability to move the money around to other super accounts without any hassle.

But to be honest, with all the super accounts I've had, I really haven't noticed much differences from one account to the next.

 

[Former]

I looked for a good advisor who is interested in talking about the market and my options. My super from old jobs sits in a Colonial account and ticks along making little more than inflation.

I'm not relying on my super account for anything other than to pay for a retirement party

 

[Vindaloo Mat]

I am "Mr Index Fund".

All retail superannuation fund in which you park your cash are the same. They recruit the same people and invest in the same stocks.

Pick up any prospectus and look at the major stocks held and without fail they will be for the normal blue chip selection of Australian and International companies. These funds simply cannot affors to have a portfolio which varies to any measurable extent from the main market....because they are a conservative lot.

HOWEVER....


they will charge you any or all of:

1`. Entry Fees (what for exactly ?)
2. A spread....that is there is a difference between the "buy" price and the "sell" price. So even if you are not charged an entry fee, if you buy some units and then sell them the same day they still take a slice of your pie
3. MER "Management Expense Ratio". Usually somewhere between 1.5 and 2.5%. An annual slug on your balance. 2% does not sound like a lot but when the market on average returns 12%p.a. over the long term 2% is one sixth of your return goes to the fund. They claim they achieve higher returns BUT:
a) do they do that over the entire course of the market cycle (ie ups and downs)
b) do they do that when different sectors are "booming" or "busting"
c) even if they did, they have to get more than 2% (plus the spread, plus the extry fees" MORE than the market before you are better off.

An index fund simply returns whatever the market as a whole returns.

1. The spread is normally significantly less than a retail fund.
2. The MER is usually < 1% sometimes 0.5%

Check it out.

Note : this logic holds not just for supeannuation but I would argue for anyone investing in the sharemarket.

 

[Steve76]

spreads

Paying a spread is inevitable in any investment - i.e it is essentially the costs associated with buying and selling an asset - i.e brokerage, stamp duty. You would be up for this whether you invested directly or via a retail fund. Agreed that MER's can be pretty pricey in retail products compared to an index fund.


Index vs active management is a debate that will go on forever - merits on both sides, and there are various stats that support both arguments. End of the day, like most things the answer depends totally of the level of risk you want to take.

 

[Vindaloo Mat]

I would like to see any evidence in favour of a broad based managed fund. Personally I find them illogical.

VM

 

[Steve76]

I would like to see any evidence in favour of a broad based managed fund. Personally I find them illogical

I guess they are illogical if you believe that over any period, it is impossible to outperform the index and that the market is fully efficient - i.e any mispricings/information are fully factored into market prices at any given time.

However, for most of us, we have finite periods over which we seek returns be it 5,10,20 or 50 years. So there is no guarantee that the index maanger will outperform the average actibve manager over that period. Indexing also means that we have no choice but accept losing money in a market slump - however, we know that not all individual share prices drop in that time, so it is possible to make money even when the overall market drops.

There are plenty of managers out there who do deviate away from the index stocks esp with newer hedge fund mamagers who often take quite contrary positions to the index. Ideally, you would split your money over several managers, both index and active ones who use different styles so you can get returns even in an overlal market downturn.

Again, as I said before, totally dependent on how much risk you want to take.

 

[Vindaloo Mat]

Originally posted by Steve76
I guess they are illogical if you believe that over any period, it is impossible to outperform the index and that the market is fully efficient - i.e any mispricings/information are fully factored into market prices at any given time.

However, for most of us, we have finite periods over which we seek returns be it 5,10,20 or 50 years. So there is no guarantee that the index maanger will outperform the average actibve manager over that period. Indexing also means that we have no choice but accept losing money in a market slump - however, we know that not all individual share prices drop in that time, so it is possible to make money even when the overall market drops.

There are plenty of managers out there who do deviate away from the index stocks esp with newer hedge fund mamagers who often take quite contrary positions to the index. Ideally, you would split your money over several managers, both index and active ones who use different styles so you can get returns even in an overlal market downturn.

Again, as I said before, totally dependent on how much risk you want to take.

I still cannot grasp the nettle.....

by definition roughly half (in fact it is less than this) of all managed funds (assuming they all deviate from the index in some way) will outperform the index. The trouble is:

a) you have to know which one before the event

b) innevitably those which are strong over a period (say a tech fund 1998-2000) will underperform in the next period. You first you have to know that this is going to be the case, know when to get out of this fund and cop the exit and entry fees of moving your money around.

I see the market like a roulette wheel. There are hundreds of funds and they all take a position in different sectors. The economy does its thing and some sectors out perform others. This creates a spread of performance the average of which is the index. The guy who bet on "2 black" prolaims to have the best research, the best staff and is able to pick the market shifts. The guy who bet on 26 red is strangely quiet. The economy does its next thing....26 red....the guy who bet on 26 red is on bloomberg and the guy on 2 black is probably in jail.

Over a 20 year period I have not seen one fund which has outperformed the market by more than the fees charged.

You can have specialist funds (ie tech or resources) but then you are really betting that one sector is going to outperorm another and that no-one else has realised it. You may get it right....you may get it right a few times....but you will also get it wrong.

 

[vanders]

Can someone please explain to me properly how supperannuation works, I know it's kinda like an investment thingo that your company pays for for when you get over 55...well at least I think thats what it is....help

 

[Steve76]

Vanders - the theory is that superannuation will pay for your retirement as by the time you retire I am sure there will be no such thing as old age pensions - so you will have to fund your own 20 maybe 30 year existence past retirement. And its not something your company pays for, it comes out of your pay. Thats why they made it compulsory to contribute x % of your pay to fund it, as they knew no one would contribute to super voluntarily unless they had to, because it seems so distant and people generally will spend for the now rather than save for later.

Bad news is that even a 10% contribution rate (or whatever it is) is most unlikely to be able to finance a remotely confortable retirement, so we will need to save more/ make additional money in other ways rather than rely on it completely. Depressing - yes !!! Esp as you spend most of your life trying to afford/pay off a house if you live in Sydney, leaving not much left over to save for retirement.

Its a depressing thought, as an employee in my 20's that you slave your way for 40+ years and then live of nothing for the 30 yrs till you die as a reward !!! Hence I am determined to start develop my own business before I turn 30 and get out of this cycle.....

 

[Darky]

So in layman's terms, cut down on fees and the rest is pot luck?

 

[Vindaloo Mat]

Originally posted by Darky
So in layman's terms, cut down on fees and the rest is pot luck?

so long as it is a broad based fund (ie "Australian Shares" or "Balanced" the key difference between any large fund will indeed be luck.

So minimize the fees and let it sit there.

 

[Former]

Stick it in your own pocket, you'll get a better return by osmosis than from a fund.

The idea that there are people in the fund management industry that are driven to get the best return for the fund contributors is long gone.

They are in it for themselves. Kick backs from investing in certain companies and real estate projects are the go. Unions direct those funds to their mates. Bank chairmen direct the funds to companies they or other directors run.

Super is a con. Put the legal minimum in and invest the rest yourself.

 

[Stucey]

Self Managed Super my friend........

Even if you have as little as $15-20K........it is worth setting up your own SMSF

 

[Darky]

Originally posted by Stucey
Self Managed Super my friend........

Even if you have as little as $15-20K........it is worth setting up your own SMSF

What would the benefits be, what are one's responsibilities in doing it, and how does one go about it?

 

[Stucey]

Originally posted by Darky
What would the benefits be, what are one's responsibilities in doing it, and how does one go about it?

Benefits are that you control where your money goes, you invest it in what you like. And the chioces are huge.

Responsibilites are:

1)When you create your own super fund, you become a trustee of that fund and are responsible for abiding by the guidlines set out in your Trust deed. Basically, this is that you will act in the best interests of the members of the fund (Which is yourself, so of course you are going to do that).....you have a certain investment strategy that you must stick to. IE: 5% cash, 30-50%shares, 30-50% Managed Investments etc.....(Whatever you decide, and it can be changed)

2) You will be responsible for keeping records of all the going ons during the year. Buy/Sell notes, dividend statements, bank statements etc..

3) Each year the fund must be audited so that it complies with APRA/ATO guidlines.

The best way to go about it is to see your accountant and they will explain everything and they are the ones that organise the annual accounts and audit, but you will need to provide them with all the relevant documentation that relates to your activities during the year.

It is worth looking into, as you are in control of where your money goes.......

 

[Darky]

Thanks Stucey.

Is there any way to access one's super funds before retirement (self-managed super or otherwise), and without suffering a crippling disability or mutilation of some sort?

If possible I'd rather use the money constructively, rather than have it sit in super funds with negative growth forecasts (and fees on top!).

 

[Stucey]

I don't think there is really any way to access it before retirement.

Unless it is an amount less than $500(roughly) and you leave an employer, then I am pretty sure you can get that amount paid to you. (Mainly for casual jobs who might have collected some super)

Self Managed is the closest you will get to the money before without actually being able to draw on those funds for personal use. But you can decide how to use the money if you are managing it yourself.

 

[Catman]

The only complaint I have with Self-Managed funds is the time consuming exercise of doing the research to determine where to allocate your funds. For a novice it can be a very overwhelming experience and a very costly one at that.

I had my Superannuation lecturer tell me about a woman who decided to set up her own fund and now that fund is providing massive returns, a stark contrast from many of the industry funds which have performed very poorly over the past few years.

But the rewards are there if you are prepared to put in the time.

 

[Stucey]

Our company did the annual returns and compliance for over 800 funds, and not many of them lost money last year.

Many made at least 10% which based on the bigger corporate funds (-5% to -10% roughly), is very good.

But like catman says, researching what you want to put your money into is the big thing.

 

[Vindaloo Mat]

Originally posted by Darky
Thanks Stucey.

Is there any way to access one's super funds before retirement (self-managed super or otherwise), and without suffering a crippling disability or mutilation of some sort?

If possible I'd rather use the money constructively, rather than have it sit in super funds with negative growth forecasts (and fees on top!).

move overseas

 

[Rooboy 34]

Originally posted by Darky
What would the benefits be, what are one's responsibilities in doing it, and how does one go about it?

Darky - what Stucey said was spot on. But in addition to that, a SMSF is costly to run unless you have significant super or know a registered Super Fund auditor who is prepared to sign your audit report and lodge the income tax return for mates rates. Most of the Funds we look after here at work (Chartered Accounting Firm), we charge between $1500 - $2000 to do the accounts and the audit. So therefore if you only have say $20K in super, then admin fees are effectively 10%. If however you had $100K in super, then this amount would only be 2% (chances are you will have the same number of investments whether you have $20K or $100K, so therefore the workload is the same and hence the cost of the accountant is the same). We generally recommend to our clients not to set up a SMSF unless they have at least $100K or will be approaching that in the very near future...

In the interim, I suggest that you do combine all your superannuation accounts into one. And the one that I'd choose is the one that your current employer is contributing to. If they are all rolled into one, then you will only be subject to one lot of fees, and it will enable you to keep better track of exactly how much you have. And then when you get enough super to start your own SMSF, or get Mrs Darky or a friend to go in with you, you'll be able to start your own Darky Superannuation Fund...

 

[Darky]

Thanks RB. As it is, I was planning to combine all accounts into one, and only then investigate the SMSF option.

I'll keep researching it, but so far it sounds complicated and expensive.

 

[Stucey]

RB, we deal with some direct client, but mostly with accounting firms. The direct ones, depending on the size and number of investments/transactions during the year, are usually around $800-$1,000. Sometimes less, sometimes more.

 

[Rooboy 34]

Originally posted by Stucey
RB, we deal with some direct client, but mostly with accounting firms. The direct ones, depending on the size and number of investments/transactions during the year, are usually around $800-$1,000. Sometimes less, sometimes more.

Gees - that's a decent price. What kind of firm do you work for???