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By the time you retire chances are that superannuation will be your biggest store of wealth outside the family home. Yet we tend to spend more time researching the best mobile phone plan or our next holiday than we do on our super.
So even if you find super mind-numbingly dull and difficult to understand, it matters. And when something really matters, it’s worth a few moments of your time.
Not convinced? Here’s why…
Tucked away in the Product Disclosure Statement (PDS) of every super fund is a warning that they are legally required to include.
Small differences in both investment performance and fees and costs can have a substantial impact on your long-term returns.
For example, total annual fees and costs of 2% of your account balance rather than 1% could reduce your financial return by up to 20% over a 30-year period.
It may sound like a generalized statement that’s easy to skip over, but it has real consequences for your retirement savings. Say you paid 2% in fees over 30 years and ended up with a retirement balance of $400,000. If you had paid 1% in fees you could have had $500,000. That’s a $100,000 difference!
Or this, from the Productivity Commission review of superannuation handed down in January 2019.
“It is nigh impossible to overstate the significant implications for members’ retirement incomes from (the) wide dispersion in fund performance over the long term.
“For example, a typical full-time worker experiencing the investment performance of a bottom-quartile fund over their lifetime would retire with a balance 54 per cent (or $660 000) lower than if they experienced returns commensurate with the top quartile (based on the median fund’s return in each quartile).
If you’re looking at joining a super fund, or simply checking whether your current fund is fit for purpose, much of the information you need will be in the PDS.
So what is a PDS and where do I find it?
“A product disclosure statement (PDS) is a document that financial service providers must give you when they recommend or offer a financial product. It must include information about the product’s key features, fees, commissions, benefits, risks and the complaints handling procedure.” MoneySmart.
You’ll find a super fund’s PDS on their home page, generally under a tag such as forms and documents. You’ll also find separate PDS documents for the fund’s accumulation, defined benefits, transition to retirement (TRR) and retirement and personal super offerings, so make sure you read the right one for your circumstances.
Alternatively, you can call the fund to request a hard copy of the PDS.
The good news is that these PDS documents are a lot easier to read than the terms and conditions for your mobile phone plan or travel insurance. They’re not as long, for one thing. Also, they are written in plain English for the most part and follow a set formula which makes them easy to compare.
If you’re still not convinced, then here’s a cheat sheet of the sections you can’t afford not to read.
1. Fees and costs
There’s no escaping fees and costs, but some funds charge higher fees and more of them than others.
Fees in a PDS document may be expressed as a dollar amount or a percentage of your account balance. Some fees may be deducted on a monthly basis, annually or when a transaction or other action takes place.
Here’s a list of the main types of fees from MoneySmart:
- Administration fees: Cover the cost of operating the fund and keeping your super account.
- Investment fees: Fees for managing your investment which can vary for different investment options.
- Indirect costs: Costs paid by your super fund to external providers that affects the value of your investment. Typically, these are costs paid to investment managers.
- Advice fees: Fees for personal advice provided about your super and other investments. Your adviser may also receive fees and commissions for certain investments they recommend to you and these are not included in the PDS document.
- Switching fees: Fees for changing your investment option within the fund.
- Buy/sell spread fee: You may pay this every time you make a transaction, including a contribution, switching and withdrawing. The fee covers some or all the cost of transactions entered by the fund.
- Insurance premiums: The cost of insurance provided through your super fund. Many super funds have a set default insurance option. You can usually choose to change your level of cover based on your needs.
- Exit fees: A fee for leaving the fund.
- Activity-based fees: These fees are only charged if your super fund provides you with a particular service for example, a family law split fee, where you’re charged to split your super following a separation and family law court order.
Not all funds charge all these fees, so it’s worth looking at what other funds charge for comparable investment options.
Add up how much you are paying in fees and other costs on an annual basis and convert this dollar amount into a percentage of your total balance. If it’s closer to 1% than 2% you are doing well.
If you’re in the balanced or MySuper default option, funds are now required to provide a worked example showing the total fees on a $50,000 balance. This makes it easier to compare with other funds on a like-for-like basis.
To see how fees will affect your retirement income, check out the government’s MoneySmart superannuation calculator.
While keeping fees and costs down is important, they should not come at the expense of performance. Slightly higher fees may be justified if the fund delivers consistently higher returns than its peers.
2. How is your money invested?
This section explains how your money is allocated to different assets classes such as cash, shares, bonds, property, infrastructure and private equity.
It will also give the investment objective of your option over various time frames expressed as CPI (a measure of inflation) + x%. Say, for example, the objective of your fund is CPI plus 4% a year over any 10-year period. Over the past decade inflation has run at an average rate of around 2%, so your fund’s objective is an average annual return of 6%.
Armed with this information, you can check your annual statement to see if your recent and long-term returns match the objective. You can also check your returns against those for comparable funds or other options your fund offers that may better suit your risk profile.
As well as returns, funds must explain the risk levels of their investment options using something called the Standard Risk Measure. This shows the risk rating of investment options from very low to very high. It also estimates the number of years you might expect a negative return in any 20-year period, from less than 0.5 times for cash options to 6 or greater for growth and high growth options.
Apart from giving you a better idea of the risks and returns you can expect this section will help you compare funds and options on a like-for-like basis.
Insurance in super
It’s a rare person who knows what sort of insurance they hold in super, if any, let alone what it’s costing them, what it covers and wait times.
Your annual statement will answer some of these questions, but for more details you need to go to the PDS. This sets out the types of insurance included in default cover for those who are eligible and the annual cost of premiums.
It will also explain how to apply for top-up cover if you think you need it.
How super is taxed
The PDS pulls together information on the taxation of before and after super contributions, investment earnings and drawdowns before and after you turn 60.
The taxation of super is mind-boggling in its complexity, especially if you are looking at a Transition to Retirement (TTR) income stream or starting an account-based pension. The PDS will help, but it’s highly recommended you also seek professional advice.
Reading your super fund’s PDS may not be your idea of a fun time, but it will be worth it when you are retired and ticking off your bucket list. You may be surprised by what you learn.