In this video interview Ian Fryer, Head of Research at Chant West, shares some insights into choosing a pension fund, including how choosing a pension fund is different to choosing a super fund, what the process is to starting a pension, and what investment option to consider in retirement.
You can read a transcript below the video.
How is choosing a pension different to choosing a super fund?
Well, I think first of all, choosing a pension is very similar to choosing a super fund.
So you want a fund that has got well-diversified investments. You want a fund that from those world diversified investments has strong long-term performance. You also want a fund that’s going to help you get the most out of your super.
So they are the ways that it’s the same, but the way that a fund is going to help you get the most out of your super is different to how they’re going to help you get the most out of your pension.
So getting the most out of your pension, there’ll be times where you’ll be wondering how should I be invested or how much should I be drawing down? And you want a fund which is going to help you with that.
Other ways where they are different. So super has built in insurance, for death and disability. And often you might want to choose a fund that fits with your occupation cause there’ll be insurance that’s appropriate for you. But in pension you don’t have to worry about that so you don’t have to worry about insurance.
The final thing is you probably want to look for a pension product, a pension fund that’s got scale in pension. You don’t want a fund that has only got a couple of hundred people in pension cause they’re not going to be focused on you as a pension member. So you want a fund that’s got thousands and tens of thousands, maybe hundreds of thousands of pension members so they focus on their pension members and just not their super members.
How do you know if you are in a good fund, particularly in terms of their pension?
So how do you work out which funds are good? How do you indeed work out which funds have good long-term performance, which is one of the key things that you can compare. So there’s comparison sites like Chant West, but there’s also others.
You can go to a funds dashboard, their MySuper Dashboard to see how their MySuper has performed. There’s a range of places you can go to look at performance. But when you look at performance, focus on long-term performance, don’t focus on the last year.
The last year isn’t going to tell you much about how good the fund is at investing. So focus on long-term performance and there’s a few places like Chant West, but a bunch of others as well where you can get that information.
What questions could you ask your fund?
You might go to your super fund and say, look, I’m thinking of moving into pension, trying to work out whether I should stay with this fund. Can you provide any information to show how your fund compares to other funds? How your fund’s long-term performance compares to others?
So your super fund hopefully can provide that information. The super fund themselves need to be on top of that and they should probably be providing that information to their members to help them make that key decision. Should I stay in this fund for pension or should it go somewhere else?
How does performance for pension funds differ from super funds?
The pension version of say a balanced fund or a growth fund is going to perform in a similar way relative to other funds as the super version. So if, if the super version is about 1% higher than other funds, then the pension version generally will be ahead. Maybe ahead by a little bit more or not by quite as much.
So you can use your super fund as sort of a proxy to see how has that performed relative to others.
Once you have selected a pension fund, what is the process to start receiving pension income?
So once you’ve decided on the fund you have to fill out an application form, and we all fill out application forms and all periods is life and they’re a hassle. But this is an important one cause this is going to set in train your income for the rest of your life. So that application form is going to ask a few key things.
The most important things are how much money do you want, and how often. But you’ll also be asked things like beneficiaries – so if you pass away who the money’s going to go to. How do you want to be invested? Etc.
Filling out application forms is scary for some people, but a fund can help you. So if you’re having troubles with it, call your fund and they can help you fill it out. You might have a financial advisor. If you have a financial advisor, they can help you fill out the form. And maybe that’s the best of all worlds because you’ve got someone else to do it for you.
And once you filled out the form and you submit the form with that information. Then once the payment date comes, so it might be say one month or a quarter after you start your pension, then you’ll start receiving that income.
What should retirees think about when considering a lump sum versus a pension?
So lump sum can be really good in particular at paying down debt. If you have some money still owing on your house, that probably makes sense to pay that off. Using a lump sum just to put in your bank account probably doesn’t make a whole lot of sense because you’ll be paying tax on anything you earn in that bank account.
Whereas if you take an income stream, if you take a pension, so a bit at a time, a bit every quarter, every year, every month, then that will stay in your super fund that will stay invested in your super fund and the great thing about being in a pension product is you don’t pay any tax on your investment and earnings when you’re in pension.
So if you need the lump sum now for something, either to pay off debt or go on a holiday or something like that, use it. But if you don’t keep it invested in super because it’s, it works out really well in a tax effective way.
Can you offer any general rules of thumb in choosing an investment option in retirement?
So when you’re in super, you’re probably invested in a balanced option, which is about 70% growth assets and that sort of works because you know that might go up and down a bit, but you’re not going to need your money anytime soon. And even if you’re close to retirement, you’re probably not going to need all your money straight away.
When you are getting to retirement it’s a matter of asking the question, when do I think I’ll need most of my money? And if you’re going to need most of your money in the next say five to 10 years, then you’re should maybe be more conservative because if there is a downturn in markets, you’re not going to have time to recover again when the markets inevitably do recover.
But if you’re going to need most of your money, sort of 10 years plus, then you can probably stay invested in some sort of balanced option because you’ve got a long period of time that you want to stay invested and get the benefits of that, and you’ve got a long period of time that if something happens in markets you can recover.
So the key thing is when do you think you will need most of your money? Is it the next few years? Go conservative. If it is 10 years plus, then go growth with at least a fair chunk of your money.
What some funds do or what some funds recommend is they say maybe you could have something like a bucket strategy. So you can have some in cash – that’s what you need for the next few years – some in conservative and then some in growth.
And what you do is you draw down your cash and at the right time you can transfer money from either growth or conservative. Probably from growth because that means over time the growth will come down and you’ll be invested in a more conservative way over time. So rather than just going straight from balanced or growth to conservative when you retire, you might start off at a balanced or a growth and then slowly transition down as you draw down from those growth assets.
The other way of course is if you’ve got a financial advisor, they can help you along the way. You, you may not need to see them every year. You might say, okay, there’s a financial advisor that I must to see every five years just to check in to see am I invested appropriately, to see am I drawing down the right amount of pension. Is it too much so I’m going to run out? Or maybe I’m not drawing enough so I’m not having the standard of living that I could? So having a financial advisor, even at a few stages through retirement can be helpful in navigating how much I should draw down and how I should be invested.
What are some mistakes people make when drawing down in retirement?
In terms of how much you should be drawing down in retirement, there’s two mistakes you can make.
One mistake is you can draw down too quickly and after five years, you don’t have anything left and you go on to the Age Pension and that’s not a good outcome.
But the opposite side is just as bad, and that is you don’t draw down enough. You don’t draw down enough so you get to your life expectancy or indeed, to when you pass away and you actually have more in your pension than when you started off your pension. There’s a lot of people who are in that situation and while that might be a good thing and you can pass a lot to your kids, the point of super is for you, not for your kids.
So what it’s likely meant is that you haven’t had the standard of living in retirement that you could have had. So, it’s important to get the balance right. Take out enough so you have an appropriate standard of living so that your account balance does go down over time, that’s what it should be doing. But not taking enough so it goes down too quickly and after five years, you don’t have enough.
So a big question is, well, how do I know how much is enough? So a lot of funds will have retirement calculators, pension calculators, to help you model and say, well, what happens if I take out this amount, this amount? What happens if I’m invested in this way versus that way? But also, you might want to see a financial advisor, that’s their job to work this stuff out for people like you.
- Definitive guide to the $1.6 million transfer balance cap
- Guide to transition to retirement pensions (TTRs or TRISs)
- Proportioning rule and super tax: What it is and why it matters
- Starting a pension from your super
- SMSFs: How to start a pension
- Guide to minimum pension payments rules (including calculator)
- Did tax kill the transition to retirement magic pudding?
- What are annuities, and will they work for me?