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How to choose a pension fund

If you’re in the market for a super pension it’s tempting to stick with what you know and open an account with your existing super fund, but you could be short-changing yourself.

After 30 years of focusing on the needs of members accumulating savings, super funds are finally shifting gears to give the retirement phase the attention it deserves.

The retirement income covenant has compelled the industry to look at how members can be assisted to balance their retirement income needs. Funds are also recognising that the proportion of people retiring with sufficient savings to provide meaningful lifetime income is increasing.

Both these factors require funds to respond with the right products and services to meet their members’ needs after they become eligible to access super. Product development is still in its infancy but there are already some interesting offerings.

Of course, low fees and good investment returns are as important for a pension account as they were when you were accumulating super savings, but there is a lot more to selecting the right retirement product.

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The following tips are designed to help you make a choice that could set you on the right track for life.

Watch the following Q&A from one of our members Q&A webinars, or continue reading for tips on how to choose a pension fund in retirement.

Q: I’m drawing a pension from an account-based pension fund. Can that account be moved or switched to another better provider? If so, what is involved?

A: What we need to think about is that the super rules, the portability rules and general fund rules allow you to move money from one fund to another fund. We’re looking here at the superannuation rules allowing that. To do that, you would just need to follow any rules that are set out from fund one, your current fund, and then follow any required process set out by the second fund where you want the money to go to. The super rules allow it. You just need to check the fund-specific rules for both of those funds, the current fund and the receiving fund. What do they allow? What don’t they allow? Even though the super rules might allow something, the funds have their own specific rules which need to follow as well. They also might have their own specific process to initiate or to follow through with those rollovers. So do keep in mind that the super rules might allow it. What do the fund specific requirements include?

But to me, if I look into your question, the real question that comes out is, can I roll over an existing pension to another fund? We know rolling over accumulation benefits is common. It happens every day in the super world. People move money from one fund to the other all the time. But to me, the real question is, can you do that with a pension? Now, we need to look at this in three distinct ways, what the super rules allow, what the specific fund rules allow, and then really what happens in real life. When it comes to the super rules, your legislation, your regulations, there isn’t a lot I can refer you to around that. I can refer you to an ATO tax ruling, which was provided a number of years ago. It set out in the tax ruling that only a lump sum amount can be rolled over. That tax ruling then doesn’t look at what happens after you stop a pension, for instance, whether that stopping of the pension refers to a member rolling that money out or to a new account in an existing fund. The ATO ruling is not specific on what happens on rollovers after you stop a pension. It just says only a lump sum can be rolled over. They go on to say, if you want specific advice on that, you’ve got to go to them and ask for it.

When you then jump into the ATO roll over information, it sets out that an existing pension might need to be stopped or commuted before being rolled over to a new fund. When you think about it, it makes sense when you look and take into account the transfer balance account rules. We’ve told the ATO in a transfer balance account that a pension started. If we need to tell them it stopped, rolled over and new pension commenced, it makes sense that that process would be pension stops, back to accumulation, roll over accumulation, and then new pension being started. To me, if I look at the basics of super, it suggests that we might need to stop, rollover, start an accumulation and then start a new pension, not rolling over an existing pension. But as I mentioned before, what are the specific fund rules? I have heard from time-to-time people saying, “Yeah, but my fund allows a pension to be rolled over”. If that’s the case and your funds allow it, then deal with your fund and follow the required process that they look at. Do they allow pension rollovers from your current fund to the new fund? And does the new fund allow a rollover pension to come in?

I haven’t really seen that happen in real life. There may be an exception in some funds that I don’t deal with. If your fund is saying that you can roll over a pension, follow the process that they require. In general, the way that I see it happen in real life is I usually we see the pension fund one ceasing. Balances go back to accumulation phase, we set up a new account in fund two, and then we roll over the amount from the accumulation fund one to the new fund two before starting a pension in fund two. That is what I usually see in real life. I just want to make it clear, if your fund says they can do it and they provide your process to do it, by all means, do that or get some advice first.

Now, some things to consider because everything I’ve just been through is your theory. If you stop an existing pension and go back to accumulation phase, then all the tax components that made up that pension initially, get mixed together with the tax component of your accumulation account. Let’s just say that over years of planning, you’ve managed to isolate tax components, and maybe your pension is 100% tax-free pension, that you made a non-concessional contribution years ago and started a pension straight away with it. That could all be tax-free benefits. If you then take that pension, which was at the time 100% tax-free, roll it back to accumulation, it gets mixed up. All those tax components get blended together, and you may have undone years of tax planning, which is almost impossible to unmix those or to separate them again.

Do consider getting some advice here before you do that. It might be that you roll over any existing accumulation money to a new fund before you stop the pension and take those balances back to accumulation of face. It is something to consider if you have spent years and years of planning around separating those tax components, which I know a whole number of you do, just from the questions that we get.

We put an article out a few months ago on this – rolling over an SMSF pension to another fund. The same concept apply in this case. Could you roll over an SMSF pension? We’ll have a look at the article we did on that. But again, the processes and procedures would be the same for non-SMSFs. I believe the standard approach is to commute the pension before you roll it over. Have a look at your particular fund rules.

The investment menu

Consider what you want and need from the investments in your pension. Are you a highly engaged and educated investor who wants the option to invest directly in listed shares and exchange traded funds (ETFs)? Or are you happy to leave selecting individual investments to the experts and looking to choose a fund that will offer a suite of premixed options? Wherever you sit on the spectrum, there should be a pension product offering what you’re looking for.

If you’re considering a bucket strategy to draw income from more stable assets while the remainder of your pension is invested more aggressively, there are even products available that can manage it for you, so you’re not required to continue making active investment decisions throughout your retirement. Our research uncovered EquipSuper and VisionSuper as funds offering this service.

Learn more about the bucket strategy

Case study: Vision Super

Vision Super’s ‘Three Bucket Pension’ invests your pension into three of their investment options – Cash, Conservative and Growth. The cash ‘bucket’ is for short-term needs, the conservative is for medium-term needs and growth is for long-term needs.

When you create your account and nominate an annual pension payment, Vision will invest three years of payments in the cash option and split the remainder equally between the Conservative and Growth options.

Each year, positive earnings are moved from the growth and conservative buckets into the cash bucket to support future pension payments. If either option has experienced a negative return, no funds will be moved from it into the cash bucket unless this is required to top up the cash reserve to cover two years’ pension payments.

If the cash option contains more than five years of payments at rebalancing, the excess will be moved into the Conservative and Growth options equally.

Vision says this pension has been designed for members who prefer a set-and-forget retirement strategy and are happy for the provider to manage their investments through annual rebalancing.

AustralianSuper offers a similar option they call ‘smart default’. This places 12% of your initial investment in cash and the remainder in a balanced option. Your pension payments are drawn from cash until there is no balance remaining, after which payments will come from the balanced option. Your annual pension payment starts at 6% of your balance and begins to increase once you turn 80. This is similar to a bucket strategy but doesn’t top up your cash bucket after it is depleted. This means that unless you change your investment strategy in future, your whole balance will be exposed to the balanced option after a few years.

If you’re a more active investor and want to choose your own mix of shares and ETFs, the funds we found that offer this type of ‘member direct’ investment are AustralianSuper, CareSuper, CBUS, HostPlus, ING, IOOF Personal Super, LegalSuper, Mercer, Superhero and TelstraSuper.

Accessing payments

Check what options are offered for frequency of pension payments, changing your payment and requesting additional lump sum withdrawals.

If frequent payments are important to you, many products offer payments as often as fortnightly.

Find out how often you can change your selected annual pension payment and if there is a fee for altering it.

For additional lump sum withdrawals, investigate whether there are associated fees, check how long a payment will take to process and if there are limits on the number of free withdrawals you can request each year.

These details should be available in the Product Disclosure Statement (PDS).

Longevity protection

With life expectancy continuing to increase, the risk of running low on savings in later life is front of mind for many people.

When choosing a pension product (or products) consider whether you want the option of guaranteed lifetime income, or income guaranteed for a set number of years. The retirement income covenant requires super funds to consider how they will assist their members to manage longevity, and some have responded with product offerings to address this issue.

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A lifetime pension could also improve your Age Pension entitlements, with only 60% of the purchase price assessed as an asset, and 60% of income payments counted in the income test. When you reach 84 and have held the product for a minimum of five years, the amount counted in the assets test reduces to 30% of the product’s purchase price.

A lifetime or fixed term product is often used in combination with a standard account-based pension so you can enjoy both guaranteed income (from the lifetime/fixed-term pension) and the flexibility to change annual pension payments and make lump sum withdrawals as your needs change (in the account-based pension). You can hold both types of pension with the same super fund, or with two different funds.

Note that our research has now also revealed that CareSuper and UniSuper offer lifetime pensions to their members, and it is likely that more new providers will continue to emerge, so always shop around.

Member services

It’s worth taking a careful look at services offered by the pension providers you’re considering. You may be able to access limited financial advice at no extra cost, or for a small fee.

Look at their website to see how simple it is to navigate and what education materials are available to help you.

Give their contact centre a call to check what their waiting times are like and how easy it is to get through to speak to a representative if you need them.

Fees

A low-fee pension product might charge a dollar-based administration fee of around $70 per year plus a percentage-based administration fee under 0.2% of your balance. In addition, there will be costs associated with managing your investments. These are not shown as transactions on your account but do reduce your investment return. Low fees can range from 0.1% for cash options to 0.8% for a high-growth portfolio (invested mainly in shares, property, derivatives and other alternatives).

Super tip

If you have a high balance, check for caps on percentage-based administration fees that can reduce your costs (for example, the fee may be charged only on the first $500,000 in your account, with no additional cost applied for the balance above that).

Of course, product fees vary widely. For example, for administration, some may charge only dollar-based rather than percentage fees. It’s worth calculating what the total would be for your account balance with all the providers on your shortlist.

When looking at investment fees, remember to compare options with a similar percentage allocation to growth assets. Growth assets cost more to manage, but also generate higher long-term returns.

Also check the historical return (over 10 years if possible). Returns are shown after investment fees have been deducted, so a higher investment fee is not necessarily a turn-off if the option also has a high long-term return after those fees have been deducted.

Performance

Most lifetime and fixed-term pensions don’t offer investment choice and investment performance is only important for the provider – you receive the same guaranteed income no matter what. This varies for some newer products, so make sure you read the PDS.

If you have decided to invest some or all of your balance in an account-based pension (by far the more popular type), then investment performance is critical. Good returns can potentially outweigh the regular pension payments that are being withdrawn, allowing your balance to continue to grow even after you have retired and begun to live on it.

SuperGuide provides the following rankings of pension fund performance that can help you to compare.

The rankings above relate to premixed diversified options that contain a mix of assets. If you’re interested comparing single sector options (international shares, property etc), visit the websites of the funds offering the products you’re considering to locate long-term returns for their pension division.

Warning: Past returns are no guarantee of future performance.

Transfer bonus

The one good reason to stick with your current super fund into retirement phase is the potential that they will offer you a transfer bonus.

The name of this boost varies from fund to fund (it is often called a ‘Retirement bonus’), but the concept is the same.

The bonus is a refund of money that has been set aside to pay tax on capital gains that are expected to occur in the future – when assets that have increased in value are sold. When you move your money into the retirement phase from an accumulation account or transition-to-retirement pension and retain the same investment option, the obligation to pay this tax is removed. The assets are moved into the tax-free retirement phase; when they are sold, there is no tax on the gain. This means the money that was set aside to pay tax can be returned to your account.

If you have a large balance the value of the transfer bonus can be significant, so it is worth keeping in mind. Some funds put a cap on the bonus they will provide, and others don’t.

Not all funds offer this feature. If you’re some years from retirement, it could be worth checking if you’re happy with your current fund’s pension offering and whether a transfer bonus is payable. If not, you may have time to move to a fund that has a good pension offering and provides this feature.

You may be required to be a member for a year or so before converting to pension to be eligible for a boost – because it takes time for money set aside to pay tax on your future capital gains to accumulate. Generally, the longer you have been a member of the fund and in the same investment option (or mix of options), the bigger your boost will be.

Note

A transfer bonus will not be on offer if you’re a member of one of the rare untaxed super funds, as they don’t pay tax on earnings in the accumulation phase.

You might be wondering if you can open a pension account with your current fund to get the boost and then immediately transfer to your preferred pension with another provider. Usually, this is not permitted. Check the PDS to be sure, but generally if you remove a significant portion of your investment quickly, there will be provisions to claw back your bonus.

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IMPORTANT: All information on SuperGuide is general in nature only and does not take into account your personal objectives, financial situation or needs. You should consider whether any information on SuperGuide is appropriate to you before acting on it. If SuperGuide refers to a financial product you should obtain the relevant product disclosure statement (PDS) or seek personal financial advice before making any investment decisions. Comments provided by readers that may include information relating to tax, superannuation or other rules cannot be relied upon as advice. SuperGuide does not verify the information provided within comments from readers. Learn more

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