With more than 500 super funds in Australia, choosing the best fund can be overwhelming.
And while most people know super is likely to be one of their biggest investment assets, ATO statistics show 43 per cent of Australians aren’t even interested in their superannuation, period.
Many Aussies choose their super provider by asking themselves the question: what is a good return on my super fund? But that’s only half the story.
What most people don’t realise but need to know, is that the sooner Aussie workers get set up with the right superfund and investments for them, the more they will have in the future.
Mistake #1: Not understanding the advantage of super tax
Tax on the investment income earned by your super is capped at 15 per cent, and there is no tax on investment income on the first $1.6 million of super funds for people over age 60. When you compare this to marginal tax of up to 47 per cent on investment income earned in your personal name, there is a lot of tax dollars to be saved by using the super rules to your advantage.
It’s important you balance the fact that you can’t access your super money until later in life, but paying less tax on your super investments means you’ll keep more in your fund, allowing you to grow your personal wealth faster.
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Mistake #2: Putting fund choice ahead of investments
When most people start thinking about choosing the best super fund for them, they get it backwards. They start by trying to compare every single one of the funds in the market which can be difficult and time consuming.
One approach to deciding which super fund is best for you is by starting with your investing preferences. Ask yourself about how you want to invest.
Do you want to take a passive investment approach vs. being more active, or to employ a socially responsible investment strategy?
The answer will help you narrow down which super funds might suit you best, because not all different types of investments are available in every super fund.
Once you have a shortlist of super funds that give you access to the investments you want, you can then compare fees, and other benefits like insurance, and their user experience.
Mistake #3: Not getting value for money with super fees
All of the main super funds today are regulated under APRA and consumers are protected in a way that if a super fund was to go broke your money is not at risk, which means you don’t need to stress about security when you choose a super fund.
The only way you can really ‘lose’ your super money is by choosing bad investments or paying too much in fees.
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If you’re specifically looking for a low cost fund, clearly fees will be at the top of your list of decision making tools, and fees are important, but they’re not the only important thing. When paying super fees, you should look to make sure you’re getting value from money for whatever fees you are paying.
Take the time to understand the different costs and some of the indirect costs like the cost of your investments that aren’t always clear on first read of your product disclosure statement (or PDS).
Mistake #4: Taking the wrong approach to insurance
You should be aware that all insurance is not equal. The difference between a good insurance policy and a bad one is driven by which situations you’re covered in. A good insurance policy will cover you for a broader range of circumstances with more robust ‘definitions’, essentially how they define whether your disabled or incapacitated.
The policies offered by most super funds are pretty average, so while they may be a good starting point, if you want real peace of mind you should probably be looking at ‘retail insurance’. This is the cover offered by all the big insurance companies in Australia [list here], and mostly have solid definitions so you know you’re covering your bases.
Thankfully, most of these insurance providers are available to members of any super fund via the ability to roll over money from any existing superfund to cover your insurance premiums.
An extra word of warning here: Insurance is really complex and hard to understand, but also mission critical for your financial security, so invest in some good help so you’re actually protected when you need it.
Mistake #5: Not taking advantage of super strategies
There are a few super strategies that can be a really helpful way to save tax and build your wealth at the same time. The government allows Aussies to contribute up to $25,000 each year to their super funds and claim a tax deduction, which can save you thousands of tax dollars every year.
Be aware this $25k limit includes the amount of money contributed by your employer as well as any employer funded insurance cover. You should take the time to understand what counts toward your contribution limits to avoid making super mistakes.
And when you contribute, as discussed above once money is inside your superfund it grows faster because of lower tax rates, accelerating the growth in your superfund.
For people with super balances below $500k, you can also ‘catch up’ on the unused contribution limit which can create some serious tax deductions and push down your annual ATO donation.
The first home super saver scheme is another approach first home buyers can use to get onto the property ladder faster. Through this scheme if you meet the criteria you can save up to $30,000 pre-tax dollars and then withdraw the money from your super to buy a home.
This is a per person figure, so if you’re looking to buy with your partner that means you can access up to $60,000 which can go a long way toward getting your deposit together.
This strategy has some risks attached to it, so make sure you understand the rules and get some good advice before jumping in.
The wrap
Your super fund will be one of your biggest assets, and it can be a great tool to create some serious wealth and ultimately financial security. But you need to be smart.
Understand what you really want in a fund, get value for money from your super fees, cover yourself with insurance, and know what strategies you can use to maximise your super money. Your future self will thank you for it.
Ben Nash is a finance expert commentator, podcaster, financial adviser, founder of Pivot Wealth and author of the Amazon best selling book ‘Get Unstuck: Your guide to creating a life not limited by money’.
Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.
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