SUPER FACTS. beatthefees.com.au

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2 1 What is superannuation? In Australia, retirement income is funded through a mix of personal savings, a government pension and superannuation (super). Super is a tax effective way to save for retirement. Super is made up of employer contributions, your own personal contributions and sometimes additional Government contributions. Money deposited into your super fund is invested by the fund s trustee, who aims to grow your account balance while you are still working. Generally, you will not be able to access this money until you retire. When you have reached retirement age and stop working, your super fund is usually converted to a pension that will give you money to live on 1. 2 Why are so many people discussing the importance of super consolidation? 6.4 million 2 Australians have more than one super account. This includes more than half of the population between 36 and 50 years of age. Between those 6.4 million people, they have approximately $485 billion 3 in super. We estimate that on average, an Aussie consolidating will save $45,000 4 in wasted fees over their lifetime. The Australian Taxation Office (ATO) wants super consolidated because the unnecessary additional dollars paid in fees to banks and super funds should be funding retirement for the people of Australia, not lining the pockets of corporate shareholders. 3 Why should I consider consolidating my super? You work hard for your money and you deserve to enjoy more of it when you retire. When you have more than one super account, you re wasting that hardearned money paying fees to multiple managers even though there is no additional benefit. It s like having multiple phone plans for one mobile phone or paying registration costs in two different states for one car. You wouldn t hand over your hard-earned money to Telstra, Optus and Vodafone for doing the same job, so why would you pay for more than one super account? It s a waste of your money. By consolidating multiple accounts, we estimate that Australians save on average around $45,000 4 in wasted fees over their lifetime. That s money that could make a big difference to your lifestyle when you retire. 4 When should I consider moving my super into a lower cost option? There is very little independent evidence to suggest that higher-cost funds outperform lower cost funds. Unless you believe your current fund will outperform lower-cost funds over time, you may benefit from reviewing the fees you are paying against other options using the BEAT THE FEES calculator. It will show you if you could save in fees by the time you retire by switching into a lower-cost fund. 2

3 5 Why is it important to consolidate earlier rather than later? When you consolidate multiple super accounts, you move to paying only one fee. Over your lifetime, the money you save in wasted fees can really add up. And the younger you are, the greater the cumulative benefit over your lifetime. When you consolidate to one fund, or move to a lower-cost fund, you start saving from that moment until the time you retire. Quite simply, if that time is short, you have less years of savings and the total savings are therefore lower. If that time is long, you have more years of savings. So, getting started earlier makes excellent economic sense. This is the principle of compounding. It is defined as the process where the value of an investment increases because the earnings on an investment, both capital gains and interest, earn interest as time passes. This exponential growth, or interest on interest, occurs because the total growth of an investment, along with its principal, earn money in the next period. This differs from linear growth, where only the principal earns interest each period. Here is an example of how compounding works in the case of super: If you saved $100 in fees last year and your fund performed at 5.3% this year (after tax), that $100 saving is now worth $ At that rate, $100 saved this year is worth: $ in 10 years time $ in 20 years time $ in 40 years time Contributing to this further is the impact of the many different types of fees super funds have. There are approximately 15 different types of fees you may be charged including fixed fees, variable fees, exit fees and more. As an example, a fund might charge a fixed fee of $78 per annum regardless of how much super you have with them, and then charge an additional 0.70% per annum of your balance in any given year. The impact of the fixed fee is much higher for people with low balances. However, over time everyone tends to build a higher balance, so the impact falls with time. Therefore, the more time you have until you retire, the more time you have to accumulate a large balance and therefore the less impact fixed fees have. Obviously putting money which you are currently wasting on multiple fees back into your super balance is going to speed up that accumulation process. For example: If you have two funds both charging a $78 fixed fee per year, you will waste $2,500 over a 20-year period. But the biggest impact comes from the variable fees which rise as your balance rises. The average super fund currently charges 1.15% per annum, while the lower cost funds average 0.53% per annum. These higher fees will make a difference of around $43,000 to the average Australian s super balance by the time they retire. Combining these fees (and before we include any other fees that can be charged) this results in potential savings of around $45,000 for the average Australian. This example shows the power not just of consolidating, but also the benefits of selecting a lower cost fund, depending upon your views of whether higher fee funds might perform better. Exit fees and other fees that are charged when you exit a fund such as Buy/Sell Spreads, all impact how much you can save by consolidating. That is because when you consolidate your funds, you will likely have to pay some of those types of fees to one or more of those funds. The longer you have until you retire, the longer you have to recoup those once-off costs. 3

4 6 Insurance through super Super funds typically have three types of insurance for members: 1. Death cover (also known as Life Insurance) which pays a benefit to your beneficiaries when you die, either as a lump sum or as an income stream; 2. Total and Permanent Disability (TPD) cover which pays you a benefit if you become seriously disabled and are unlikely to ever work again; and/or 3. Income Protection (IP) cover which pays you an income stream for a specified period if you can t work due to temporary disability or illness. Your employer s default super fund must offer a minimum level of life insurance, depending on your age. You can usually increase, decrease, or cancel your default insurance cover. Your super fund s website will have a Product Disclosure Statement (PDS) which explains the insurer they use and details of the cover available. Like other insurance policies, you will pay insurance premiums. If your insurance is through your super fund, the premiums are deducted from your super account balance. That s another one of the fees you are likely paying in multiple if you have multiple super accounts with embedded insurance. The key to deciding if insurance through super is right for you is knowing how much cover you need based on your personal circumstances, whether your super fund will offer the full amount, and being able to compare the costs and conditions of cover with other providers. Being insured through super is often a cost-effective and easy option. However, it is a good idea to shop around to make sure you are getting the cover you need and want at a competitive price. If you rely upon the insurance in your super funds, before switching or consolidating super funds, you should ensure you can get the Death, TPD or IP cover you want, in the fund you have selected. Ask the super fund if they will allow you to transfer your current level of cover before you roll your super over. It is particularly important that you take care in this decision-making process if you have a preexisting medical condition or are aged 55 or over. Seek financial advice if you are unsure 5. 7 What happens to my super money? Money in your super account/s is invested by your super fund. Most super funds offer a variety of investment options. These usually include pre-mixed options that will contain a mix of different asset classes, and single sector options such as cash, property and shares. When you retire, your super can be taken as a lump sum, a regular income stream, or a combination of both. If you choose to take your super as a retirement income stream, the money that you re not accessing continues to work for you and earn interest 6. Your investment returns will impact how quickly your super grows so it s important to choose an investment option that is appropriate for your investment timeframe and tolerance for market fluctuations. 4

5 Links to useful information 1. The Australian Securities and Investments Commission (ASIC) has a website called MONEYSMART where you can find a range of useful financial information including information about super. All about super what it is and how it works: superannuation-and-retirement/how-super-works Super consolidation why, how and what to consider first: superannuation-and-retirement/keeping-trackand-lost-super/consolidating-super-funds Insurance through super what, why, where and how much superannuation-and-retirement/how-superworks/insurance-through-super 2. The Australian Taxation Office has a portal dedicated to information about super which is extremely detailed and will likely provide answers to any outstanding questions you may have. The link below will take you to the information for individuals Chant West is a super research and consultancy firm established in Their research on super and pension funds is highly regarded for its accuracy, insightfulness and integrity, and it is widely used by financial advisers and by the funds themselves. The research feeds into a suite of user-friendly tools that make it easy for funds, advisers and individual consumers to analyse and compare products on a fair, apples with apples basis Super Ratings Australia is a non-aligned research provider much like Chant West. You can find educational information and tools in SuperSavvy which are designed to help you make more informed decisions about your retirement savings. You may find their Jargon Buster helpful in understanding the terms used by the super industry Super Guru is a website built by the Association of Superannuation Funds of Australia which is a non-profit organisation that aims to help achieve effective retirement outcomes for members of super funds through research and advocacy. The purpose of the Super Guru site is to provide information that will help you to understand and maximise your super. It is a site for Australians of all ages and stages of their life. Information on the site is put together by ASFA s writers and industry-leading policy and research teams, who have decades of experience in super, investment, financial services, self-managed super funds (SMSFs), taxation and regulation. 5

6 Links to independent calculators 1. Super Guru has several calculators which will help you to work out how much super you need, how much you can save, how much insurance you can get in super and a range of other useful information The MONEYSMART super calculator helps you to work out how much super you ll have when you retire and how fees will affect your final payout. This calculator does not calculate the fees of specific funds. You therefore need to input these to work out your potential savings over your time to retirement. You could however do this yourself and then manage the process of consolidating your funds, thereby avoiding paying a fee to BEAT THE FEES to manage both Chant West AppleCheck provides a quick and simple web-based tool that allows you to compare Super or Pension funds on a fair and apples with apples basis. For a fee of $55 the tool allows you to select up to 3 funds, add your assumptions and then view the results online. Some large super funds provide access to the tool free. A report is ed to you with the results. This calculator only shows you what you will save in any given year, not what the compounding impact will be over the many years you have to retirement. ChantWest is a tool used by the financial planning industry, so typically you will need to pay advice fees to come up with similar estimates that BEAT THE FEES will provide, but then you will have personal advice which has its benefits over our no advice service Super comparison websites can be useful to help you compare super funds. MONEYSMART provides tips on how to use them wisely. From this same page, you can follow links to several super comparison websites in the marketplace: how-super-works/australian-superannuation 2. Australian Tax Office (ATO) 3. Calculation based on ATO statistics 4. Based on the following calculations generated by BEAT THE FEES: If you have two funds both charging $78 per year, you will spend $2,500 in unnecessary fees over a 20-year period. However, the factor driving the greatest impact on savings is not fixed fees, it is the variable fees charged by many funds. These variable fees rise as your balance rises. The average super fund currently charges 1.15% per annum, while the lower cost funds used as a benchmark in BEAT THE FEES (HostPlus Indexed Balanced, REST High Growth, Vision Sustainable Balanced and NetWealth Indexed Balanced) average 0.53% per annum. The higher fees will make a difference of around $43,000 in wasted fees to the average Australian s super balance by the time they retire. We have calculated this using the average age of a pre-retiree of 44, an assumed average retirement age of 67 (that is, their projected retirement age, not the retirement age today) and a starting balance set as the average balance for today s holders of corporate, industry, retail and public-sector funds (we have excluded SMSFs as the fee structures are individual and therefore the subject of personal advice). The assumptions used are detailed in the BEAT THE FEES Assumptions document which is available on our website on the Fine Print page. The potential savings for every individual holder of super are much greater if one uses the cheapest funds in the market (HostPlus and Australian Super s Indexed Balanced funds). However, we have taken the view that pure index funds are not suitable for everyone and have therefore used the mix of funds. We have also taken a conservative approach to assumptions such as investment performance, further lowering the estimated savings. Combining these fees, and before we include any other fees that can be charged, this results in potential savings of around $45,000 for the average Australian over their lifetime. This example shows the power of not just consolidating multiple super accounts, but also that consolidating into a lower cost fund will deliver significant savings over time. Of course, some people will believe that a higher cost fund may perform better, in which case they may prefer to sacrifice savings in favour of potential performance. That is a decision every individual must make based on their personal circumstances and, ideally, after seeking professional advice. As BEAT THE FEES is focused only savings not performance, we do not consider this in our calculations how-super-works/insurance-through-super 7. how-super-works 6

7 IMPORTANT INFORMATION The information provided by BEAT THE FEES is of a general nature only and should not be taken as a complete or definitive statement about superannuation, superannuation funds, retirement planning or any of the service providers mentioned. You should not make decisions about your superannuation solely on information provided by BEAT THE FEES. You are responsible for your own investment and financial decisions and should obtain individual tailored financial advice whenever necessary. Past performance is not a reliable indicator of future performance. You are responsible for reading the full Terms and Conditions before utilising BEAT THE FEES services. We also recommend you read the Disclosures and Calculator Assumptions before making a decision to consolidate. BEAT THE FEES provides general advice as an Authorised Representative of MyOnlineAdvisers Pty Ltd AFSL Audacious IP Pty Ltd T/A BEAT THE FEES ACN hello@beatthefees.com.au