Australians are notorious for their banking apathy – while we all whine about transactions fees and ATM charges, few of us actually take the time to find alternative arrangements. So when it comes to our super savings, is our failure to take a closer look at the products available, and the sometimes hidden costs of investing, having a detrimental impact on our future retirement income?
Fortunately, the days when superannuation product providers levied hefty exit fees for anyone trying to move their savings, seem well behind us. But beware if your arrangement is one of the old-style endowment policies or life company funds, says financial planner Ray Griffin, managing director of Griffin Financial Services. “Very large exit fees in these schemes can still apply, so people need to be very careful.”
You also need to consider the costs of joining a new scheme. Consultant Tom Collins says: “Some entry fees can still be as much as 5 per cent, but most retail funds now charge between 2-3 per cent as a typical entry fee, while corporate and industry funds do not normally have an entry fee at all.”
A minimal entry fee may also have a hidden sting in the tail, says Griffin. “People should beware of some of the so-called nil entry fee funds where an exit fee of up to 5 per cent of the fund balance can apply for the first five years.
“Also, even if you don’t necessarily rollover to another super fund, there may be a permanently high management fee. Over the long-term life of a super account, this is where some serious costs arise. An extra 0.5% a year doesn’t sound like much, but it truly adds up in the long run.”
Triggering a capital gains tax event may be another deterrent to super switching. Collins says: “If you are transferring to another fund, with a different trustee, there could be exit fees, transactions costs (as a result of converting investments into cash), any capital gains tax on your realised assets, entry fees and the transaction costs of acquiring new investments.”
It is also worth taking a closer look at the insurance arrangements which accompany your super scheme. If you entered your original scheme as a fit and healthy 20 year-old, insurance probably came as an extra automatically. At age 45, a new scheme provider might not provide the same benefits without requesting some in-depth medical examinations. If you find yourself with serious health issues, getting cover under the new scheme may not even be possible.
Investment performance should act as the main instigator of fund changes, but again financial disinterest seems to prevail. Collins says: “Few people proactively look to change their super arrangements. Not as many people as originally expected have exercised their choice of fund.”
Nor do people seem to be taking advantage of the opportunities now available in most super schemes to tailor the investment mix. Collins adds: “Changing funds could affect investment growth, but if you’re invested in a product with great investment choices, then there should be no [negative] effect. The main issue of investment growth is that many people do not choose the investment options, but rather rely on the default option, which may not suit their needs.”
Ultimately, when deciding whether to make a super switch, individual needs and requirements must take precedence. Collins says: “Super is more than investments. For many the insurance is important, especially where there is a group with more generous automatic acceptance limits. It can also be about tax management. Some master trusts and self-managed super funds can provide for investments to be structured in such a way that the member pays little or no tax – including contribution tax.”
Inevitably the best deal will vary from member to member, says Collins. “But most people are apathetic – until they have a significant balance.”