Common superannuation mistake costing too many Aussies $166,000

It’s an easy money mistake to make – but the cost is $166,000 and there’s an easy way to avoid it from happening.

If you’re like most Australians, you probably think superannuation is something you only have to worry about when you’re old and getting ready to retire. That’s only half right.

When you’ve got a long time until retirement, your super doesn’t need too much of your time or attention – but a little goes a long way here.

For a 30-year-old earning the average Australian income of $92,029 with $50,000 in super, an annual difference of 1 per cent in returns would mean an extra $166,578 in your super fund by age 65.

Choosing the best super fund to hold your superannuation investments is one of the biggest drivers of how your super money will grow over time. There are four main types of super funds you should be aware of to make the right choice for you.

Industry funds

These are funds that were originally set up to service the workers within a specific industry. The majority of these funds are not run for profit, which for most results in their fees being lower than the majority of other superannuation fund options.

Typical fees on an industry super fund are between 0.5 per cent and 1 per cent per annum, meaning that for every $100,000 you have invested you’ll pay between $500 to $1,000 every year.

Choosing the best super fund for you can pay off big over time. Picture: Unsplash, Melissa Walker Horn.

These funds can be great to reduce your super fees, and many of them have decent investment options with good performance history. But because industry funds are run as low cost fund super products, generally speaking the available investment options are slightly more limited, and they typically don’t invest as heavily in their technology which can take away from your user experience.

Retail funds

Retail super funds are typically run by for-profit companies, and are generally more expensive than industry options, but most give access to a wider range of investment options.

Typical fees on retail super funds range between 0.5 per cent and the most expensive are up to a whopping 3 per cent, meaning that for every $100,000 you have invested the fees will be between $500 to $3,000 per annum.

Corporate super funds

These types of funds are typically retail funds that are offered to larger employers with discounted pricing and sometimes even subsidised benefits like insurance cover. The super funds do this because they’re chosen by the employer as the default superannuation option, meaning they get instant access to a large pool of potential members.

Corporate super funds are typically offered to larger employers. Picture: iStock

Typical fees on corporate super funds range between 0.5 per cent to 2 per cent, so for every $100,000 you have invested the fees will be between $500 to $2000 per annum.

Some of these corporate deals will also include ongoing financial education or access to an adviser which can be helpful. Just keep in mind that when your financial education is coming from the provider of a financial product, there’s a potential conflict of interest because it serves them for members to remain within their financial product.

Overall how good a corporate super fund is depends on the deal an employer can strike with the super provider. I’ve seen really good deals here with ultra low fees and good subsidised benefits, and others that are very expensive without giving much in return. The devil is in the details here, so if your employer offers a corporate fund you should take the time to understand how it compares to the alternatives.

Self managed superannuation funds

Self managed superannuation funds (SMSFs) are a special type of super fund that gives you full responsibility for the management of your superannuation money and allows you to invest in anything from artwork and antiques to traditional investments like property and shares.

The operations of an SMSF are fairly involved and can be quite complicated and time consuming and expensive, and when you have an SMSF you need to complete and manage a tax return and audit for your fund each financial year.

Self-managed super funds offer more control but can be complicated. Picture: iStock.

I’ve spoken to a lot of people that are considering using an SMSF because they want more control over how they invest their superannuation money. But in reality, you can access most investments that people want and get almost the same level of control through a cheaper super fund option.

Guidance suggests that using an SMSF only starts to make sense when you have at least $250,000+ in your super fund, and in my opinion even then you need to really make sure the benefit you’re getting from using an SMSF is worth the cost.

How to choose a super fund

The options above all have their benefits and disadvantages, and any option can be good for you and not good for someone else. There unfortunately is no ‘right fund’ type you should use or ‘wrong fund’ to avoid. But there is a right way to make your super fund choice.

Start with your investments

Given your super fund is essentially just an investment account with more favourable tax rules, the investing strategy you want to follow with your super money will be the main driver of what super fund is best for you.

Here you want to choose your investment strategy, and decide whether you want to follow a passive index fund investing approach, invest actively, or use ethical or socially responsible investments. Then when choosing which super fund is best for you, you can narrow down the list of which funds make the most sense for you by starting with those that give you access to the investments you want.

Look at fees

Fees aren’t everything when it comes to super, but they are important. Given the super fund market is highly competitive and the fact super fees are trending down over time, you should be looking at fees so you don’t pay more than you have to.

Look at fees so you don’t end up out of pocket. Picture: Unsplash

Once you’ve narrowed down your potential super funds by looking at which gives you access to the investments you want, you can rank the funds by those with the sharpest pricing. You can use super comparison tools like this one from ASIC to save you time when comparing funds

For example, if you want to follow an index fund passive investing approach, you could first look at the funds that offer good index investment options. From there, you look at which ones are priced most competitively to get your short list.

Look at features and user experience

If you value certain features or benefits from your super fund, such as the ability to buy exchange traded funds (ETFs) or direct shares, better quality insurance cover, or a slick user experience you might be prepared to pay a little extra. But if you’re paying for features you’re not using, then your money is going to waste.

Understand what you want and what’s available from your different super options, then you can compare the fees against funds with similar features.

Beware of insurance when switching

Many Aussies (and young people in particular) fall into the trap of thinking they’re bullet proof and don’t need insurance, but research done by the Australian Financial Services Council through their ‘Underinsurance’ report show we have a huge underinsurance gap in Australia.

If you don’t think about your insurance cover when switching funds, you can end up losing the cover which can be a serious problem if something goes wrong. If you’re looking to switch your super, take the time to understand the insurance cover you have in place now, what’s offered by your new fund, and what benefits you might be giving up if you switch. This way you can make an informed choice and make the right moves for you.

The wrap

Choosing the right super fund will have a huge impact on how your investments and wealth build over time, so making the right choice will pay big dividends. But once you’ve selected a quality super fund to deliver good investment performance over time, unfortunately your work doesn’t (quite) stop there.

The superannuation market is highly competitive, products tend to evolve (and get cheaper) over time. This means that even once you’ve chosen a cracking super fund today, you need to check in on your fund over time to make sure it’s still the best one for you.

Your super fund shouldn’t need a lot of your time and attention, but a little bit goes a long way here.

Ben Nash is a finance expert commentator, podcaster, financial adviser and founder of Pivot Wealth www.pivotwealth.com.au, the host of the How to be Successful with Money podcast, and Author of the Amazon Best Selling Book ‘Get Unstuck’ www.getunstuckbook.com.au

Ben runs regular free online money education events to help you make better money choices and get ahead faster. You can check out all the details and book your place here

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.

Originally published as Common superannuation mistake costing too many Aussies $166,000