Category: Superannuation

Super funds come in two basic forms.

Defined benefit funds

With defined benefit funds your final pay-out is “defined” by a set formula. For example, you may get four times your salary if you retire at 55, five times at age 60 and so on. You know in advance what you will get.

These were once quite common in public sector super funds and with some larger companies. The advantage of defined benefit superannuation is certainty about the size of your payment upon retirement or leaving the company. The bad news is that it may be less attractive if you don’t stay with the one company until retirement. I know many people who feel trapped by this type of super. The end benefit is so attractive, they just can’t afford to leave. Low motivation is bad for the employee and employer and what a sad situation it is, because no one wins. These people wait for 5 o’clock so they can go home, and long to retire.

With defined benefit funds, how the investments in the fund perform is of no interest to you. Your end benefit is paid anyway (unless your company goes broke and defrauds the super funds). Your employer will be very interested in investment performance though because the better the fund does, the less he has to put in! You may have seen very public arguments about “surpluses” of defined benefit funds. A surplus means simply that your super fund has more money in it than it needs to pay out to its members in entitlements. Often employers will try to reclaim this surplus, and employees fight to hang onto it.

Providing the surplus is accurately measured, I have no doubt who it should belong to – the employer. They guarantee the member will receive a set benefit and dips into the company coffers if the money is not there. So, given the employer must meet any shortfall, I have no doubt any surplus, if it occurs, also belongs to them.

Accumulation funds

Accumulation funds are becoming increasingly common and are also very simple. Whatever you or your employer puts in, plus investment earnings, less expenses, is yours.

While with defined benefit funds you concentrate your attention on the documentation describing your end benefit and don’t worry about investment, with accumulation funds you do worry about investment and you need to ask lots of questions. With accumulation funds what you get is determined by what goes in, but the expenses of the fund and, in particular, the performance of the investments it holds, are critical to what you end up getting.

Thing you should know about your accumulation fund
  1. How much is your employer putting in?
  2. How much do you have today?
  3. Where is the money invested ?
  4. What are the fees and charges?
  5. Do you get any insurance cover, if so how much?
  6. Can you add your own money to your employer’s super fund?
  7. Do you have any choice about how the money is invested?

If you don’t know the answer to these issues – ask! No reputable employer would not want to answer these questions.

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Raise the topic of superannuation next time you have a few friends around for a barbecue and you’ll get a range of reactions. Some people will look at their watches and ask “Is that the time?“, some will pour themselves extremely large drinks, some will slip into a type of coma, others will become completely absorbed by a spoon or salt shaker, and a few will say “I think super is okay because people keep telling me it is, but I’m not really sure why.” The majority will tell you that it is confusing, keeps changing and is all too hard.

Well, I’m one of those people who keeps saying super is okay, and what I am going to try to do here is explain why. And I hope as you read this your mind won’t drift off to a palm-fringed beach on a tropical island. Bring it back here if it does, because, confusing as super may be, it’s worth knowing about. Indeed, if you play your superannuation cards properly, you will actually be able to accompany your mind to that tropical paradise when you retire, as well as doing many other things you have only dream about during your working life.

What is superannuation?

Basically, superannuation is designed to provide for us financially in retirement. It’s built up over our working lives from contributions made by our employers and, hopefully, topped up out of our own pockets. It’s also taxed lightly – both to encourage our active contribution towards it and to increase the size of its pay-out at the end.

That’s the good news. The bad news is that it’s confusing, your money is locked away for a very long time, and the Federal Government continually fiddles with the rules. While this may bring us no joy, the fact is, we need super.

Consider this: in 2001 we have around six people in the work force for every person in retirement. That’s a large pool of taxpayers from which to fund the aged pension. But, because we are having longer and having fewer children, by 2030 there will be only there people working for every retired person.

Let’s look at it another way. Today we have around 8.267% aged 65 or more populations. In 19 years’ time, when I reach 65 there will be just under 10% of us! Already pensions are a major funding burden, accounting for more than 30% of the Federal Budget, so can you imagine what it’s going to be like then? Either taxpayers in  the future will have to be taxed to within an inch of their lives if the aged pension is to remain at its present (modest) real level, or (far more likely) the pension will fall.

But “What about the value of the family home?“, I hear you say. Who cares about a pension if you’re sitting on good real estate? Okay, but do you really want to find yourself at retirement with no option but to sell the home you’re perfectly happy living in and don’t wish to leave? And after you’ve sold and put aside sufficient proceeds to live off comfortably for the rest of your life, you will be faced with taking a very substantial downgrading in the type of housing or the location you can afford. No, relying on the value of your home is not the way to plan for your retirement.

A comfortable retirement can only be funded by a separate next egg of investments, which has been built up for that purpose during your working life. And your success in building up a suitably sized nest egg will depend on your success as a saver. The reason is very clear. If you don’t save, you don’t invest, and if you don’t invest you will have nothing (apart from your home) to retire on.

The problem is, however, that we are not good savers. Certainly earlier generation who lived through tougher times were much better at it than we are. That’s why, I am sure, the Government has decided to force us to save, and the way they have chosen to implement this is through compulsory superannuation.

The key word here is compulsory. If there was only voluntary superannuation there’s little chance we’d contribute enough for it to do what it supposed to do – provide for a comfortable retirement and head off a society increasingly burdened by taxation to pay for the aged.

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