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If you think all the hard work of creating a retirement income is over once you retire, unfortunately you’re mistaken. There are still lots of decisions to make.
A key one is how to invest your hard-earned super savings. Most super funds offer super pension products with a wide range of investment options, so you’ll be faced with lots of choices.
To help you navigate the maze, SuperGuide has created a simple guide to the main types of investment option on offer.
Why choosing the right investment option for your super pension matters
Selecting the right investment option when you start a super pension or income stream is an important decision.
Your selection can affect how much retirement income you have available to withdraw each year and how long your savings last. Research over the years has shown that generally, 60 cents in every dollar of retirement income you receive comes from the investment earnings you make in retirement.
Before starting your super pension, you need to carefully consider which investment option is best suited to your personal circumstances, retirement goals and tolerance of investment risk.
Your super fund’s Investment Choice Guide will provide useful information about the different options, or consider consulting an independent licensed financial adviser for more assistance.
What investment options are offered for super pensions?
Super funds generally offer four types of investment option if you apply for a super pension with them:
- Pre-mixed options based on investment risk categories
- Other pre-mixed options
- Choose your own or DIY investment mix option
- Direct investments.
1. Pre-mixed options
Pre-mixed investment options are invested in a diversified combination of assets such as shares, property, infrastructure, fixed interest and cash. Some super funds offer up to 350 different choices when it comes to asset mixes.
Pre-mixed investment options for super pensions are usually categorised by the amount of growth assets (broadly shares and property) they contain:
| Option type | Level of growth assets % | What they invest in |
|---|---|---|
| All growth | 100 | Growth-style assets only (usually shares and property) |
| High growth | 81–100 | Mainly growth assets with small amounts of cash and fixed interest |
| Growth | 61–80 | High allocation to growth-style assets with an emphasis on long-term growth |
| Balanced | 41–60 | Higher allocations to fixed interest and cash than shares and property |
| Conservative or Capital stable | 21–40 | Mainly fixed interest and cash with lower allocation to growth assets |
Source: Chant West and author’s description of investment options.
2. Other pre-mixed investment options
a. Age-based or lifecycle investment options
Some super funds offer lifecycle investment options to their pension members as pre-mixed investment choices. A lifecycle investment option is based on the idea that as you get older your investment mix should have fewer growth assets as you have less time to recover from any investment market declines.
To help achieve this, lifecycle investment options automatically shift their investment mix to slowly reduce the level of growth assets and increase the amount of defensive assets (broadly cash and fixed interest).
b. Socially responsible/sustainable investment options
Super funds now offer retirees the opportunity to have their super pension assets invested in a way that includes consideration of sustainability or social responsibility factors.
Socially responsible investment options usually contain different levels of growth assets (such as Sustainable Growth or Balanced Socially Responsibile) to allow you to choose an investment option in line with your risk profile.
c. Indexed investment options
Using a diversified indexing strategy is an increasingly popular investment option for pension assets. Indexing is often a lower cost approach to investing as it selects assets based on major investment indexes, such as the S&P/ASX 300 Index.
3. Choose your own or DIY investment mix option
With these investment options, retirees can create their own mix of different asset classes to suit their personal circumstances. The options generally use a managed investment fund based on a single asset class.
This means you can create your own tailored investment portfolio to match your goals, risk profile, or to complement investments you hold outside the super system.
| Investment option | What they invest in |
|---|---|
| Australian shares | Companies listed on the Australian Securities Exchange |
| International shares | Companies listed on global share markets |
| Global property | Australian and overseas property |
| Global fixed interest | Australian and international bonds and loans |
| Cash and term deposits | Short-term market securities and short-term bonds |
4. Direct investments
These investment options usually offer a selection of direct investments to choose from, including direct shares, exchange traded funds (ETFs), term deposits and listed investment companies (LICs).
If you owned direct investments through your super fund prior to your retirement, some large super funds now offer the option to start a super pension that invests in these assets without needing to sell and repurchase your investments when you retire.
What happens if you don’t choose an investment option?
Not everyone wants to choose how the money in their super pension is invested.
If you don’t select an investment option when you start your super pension, your super fund will normally invest your account balance into a default investment option.
Default pension options are usually based on a Balanced or Conservative investment strategy approach (see table earlier in the article under ‘Pre-mixed options‘).
don’t forget to check the cost – so called management expense ratio of the investment base you are considering. Typically the actively managed ‘high growth’ options are going to cost you a higher percentage of your investment. There’s a fair chance the returns will be more volatile and may do no better overall than a base that is more passively managed. You need to read the product disclosure info supplied by your super fund to get an understanding of how your money is going to be managed under the option you are thinking about, starting with whether managed in house or contracted to an external fund manager.