Choosing a superannuation fund is one of the most significant financial decisions you will make during the course of your working life. Your choice of fund can have a substantial impact on your super balance at retirement.
On average, you will earn income on the super contributions you make, which will be reinvested and earn you further income (known as ‘compound returns’) for a period of about 40 years. This is why researching superannuation fund options available to you at the start of your super journey is so important, as it can pay off significantly in retirement. However, as you start your career as a busy doctor-in-training, it can be easy to relegate the choosing of a super fund to the simple ‘ticking of a box’. This article aims to provide a solid overview of the basics of superannuation to assist in the planning and research of this early-career decision, that will play a major role in most people’s long-term financial health.
Superannuation 101: what do I need to know about super?
There is a lot to consider when choosing a super fund that is suited to your long-term financial goals, and your ethical stance on issues. To make things less complex, this article breaks down decision-making factors into the following sections:
Superannuation is a legislated way of long-term saving for retirement. Under Australian law, your employer must pay a percentage of your wage into a super account that is attached to a super fund, which invests that money on your behalf until you retire. To qualify for employer super contributions you must be between 18 and 70 years of age.
To access your super, you must wait until you have reached your ‘preservation age’ – currently between 55 and 60-years-old, depending on the year you were born. Under special circumstances, you may be able to access your super early.
Superannuation is divided into two phases: accumulation phase (when you are accumulating savings) and the pension phase (when you can access the savings), where the first phase critically impacts the second. The growth rate of your super is dependent on several factors, some of which may be out of your control (such as the impact of a global pandemic on the investment markets), while other factors are directly influenced by financial decisions made by you, such as contributing spare cash into your super fund. In making such decisions, you should first be aware of the regulations around superannuation covering the age at which you gain access to superannuation.
‘Topping up’ your super may be an investment strategy you consider during your career as a tax-effective method of boosting your retirement savings, however there are many factors to consider and there is a limit to how much extra you can contribute. This may be of particular interest if you are planning to take time out of the workforce for family commitments (a contributing factor to why women on average, retire with less superannuation than men), to undertake further specialisation training such as an unpaid overseas medical fellowship, or a period of time on a reduced income whilst completing a medical PhD.
Most super funds fall into the following categories: retail, industry, public sector or corporate and Self-Managed, with each fund having unique offerings.
Retail super funds
These funds are usually run by major financial institutions or large investment companies, and open to anyone. They are typically thought of as offering a range of investment options for those with specific investment preferences.
Industry super funds
Most of the larger industry funds are open for anyone to join, while membership to some smaller restricted funds may be limited to people who work in a specific industry, including the medical sector. They may be categorised as providing low fee structures for lower balances.
Public sector super funds
Are super funds for government or university employees.
Corporate super funds
Some large companies operate a super fund under a board of trustees who are not independently appointed (e.g. they are appointed by the company) while other corporate funds are operated by a retail or industry fund, but only available to employees of the company.
Self-Managed Super Funds (SMSF)
As the name would suggest, this type of fund is typically run by the members themselves (self-managed). These funds provide greater investment flexibility, however, the trustee(s) of a SMSF carry the burden of legal responsibility for the administration, compliance and investment decisions made within the fund. There is an expectation of regulatory and investment expertise for such a fund due to the complexity and cost involved.
Of course, every super fund is different and may not align with the above description. It is for this reason that it’s vital to understand the super fund you hold and whether it’s appropriate for your needs.
Seeking professional advice from a licensed financial adviser may assist with aligning an appropriate fund and investment options to your specific needs.
Most super funds offer a range of investment options distinguished by risk profiles, which identify the level of risk an individual is prepared and able to accept in the asset allocation of an investment portfolio. People’s appetite for risk investment varies greatly and can be influenced by a number of factors including your personal goals, how comfortable you are with the possibility of market downturns, the length of the investment period and the ability to manage the stress of unpredictable returns.
It is important to understand the nature of the investments you are making within and whether that strategy meets your financial objectives and personal situation.
Risk profile terminology and the associated risk differs depending on the super fund in question, however typically the categories are:
- Conservative/Defensive (lower risk);
- Moderate (medium risk)
- Balanced (medium/high risk);
- Growth (high risk); and
- High Growth/Aggressive (very high risk).
While each person’s definition of risk is different, investments generally fit into two broad categories: growth assets and defensive assets.
Usually in the form of shares in companies or property, which may generate income and capital returns. These investments have the potential to earn higher returns but carry higher short-term risk. Investment returns vary and are subject to market volatility.
Generally present a lower-risk for capital loss and a greater emphasis on capital stability and lower income returns. Defensive assets include cash and fixed interest investments and have a lower risk of short-term fluctuation.
It’s important to note that there is no specifically defined industry definition of growth and defensive assets – meaning that one fund may categorise an asset as defensive and the other a growth asset (i.e. certain classes of property and fixed interest). Based on different interpretations, you should check what type of assets are categorised as defensive and what are considered growth assets in the fund you are researching. It is not about investing for the highest returns for your risk profile, but giving consideration to the amount of risk taken to generate a return.
An effective way to determine an appropriate risk profile, in conjunction with your goals, is to seek professional guidance from a licensed financial adviser.
The idea of investing your super into a fund that reflects your principles, values or personal beliefs is increasingly appealing to a growing number of doctors, and investors in general. Most ethical funds promise to put your super in ‘positive action’ investments, such as clean energy, or refrain from investing in certain sectors such as fossil fuels or weapons.
Ethical superannuation funds certainly provide an opportunity for you to invest your money into a fund representing ideas and beliefs you hold true, but it is important to research any fund claiming to be ‘ethical’ before choosing to invest. There is no set definition of an ethical fund – its companion descriptions, ‘sustainable’, ‘socially responsible’ and ‘green’ – or its specific ethical filters covering each industry. With such general definitions, ethical investing could be anything from anti-gambling to anti-stem cell research, which is why it’s important to understand that everyone’s definition of ‘ethical’ is different – a consideration that particularly applies to some industry-specific funds. Other ‘ethical’ funds apply a broad and wide-ranging scope to their investment criteria such as carbon footprint or human rights record.
While the exact industry and type of asset an ethical fund will invest in varies, below are some examples of what may be considered as features of ethical funds:
Sectors forming a positive screen within ethical investment may include:
- Climate change/renewable energy
- Sustainable consumer goods
- Medical solutions / research
- Innovative technologies
Sectors forming a negative screen for ethical funds may include:
- Fossil fuels (coal, coal seam gas, oil)
- Controversial weapons
- Tobacco & alcohol
- Child labour
- Human rights
- Air / ocean pollution
- Gun control
It is important to do your own research to help you gain a deeper insight into the types of investments a fund describing itself as ethical is making, and to determine whether this aligns to your personal values. It is also worth noting that many of the large superannuation funds that are open to everyone, offer ethical investments as part of an overall option on your investment portfolio. Industry funds are also increasingly offering their own ethical options, typically specific to a certain risk profile, so it’s important that it aligns to your goals from both an ethical and a risk profile perspective. When considering adding an ethical layer to your superannuation fund, it’s important to read the fine print!
All superannuation funds carry costs passed on to members, usually associated with the management of the fund. However, the type of fees and amount charged can vary greatly from one fund to another. Usually deducted monthly, fees can be charged via a dollar figure, as a percentage of your balance, or both.
It is important to understand the types of fees you could be charged by your super fund, so you know what you are paying for.
Different types of fees can include, but are not limited to:
This is the direct fee super funds charge for managing your account, issuing your statements, providing call centre services, building and maintaining online portals, sending any other required communication, and also the compliance costs of meeting legal requirements of a trustee. As an example, updates of legislative changes to the super industry. Some funds also have a cap on the total administration fee they can charge.
This fee covers the professional management of your investment within super and varies between investment portfolios. These fees are usually charged as a percentage of your balance and drawn from the investments themselves as opposed to the member’s balance. Some funds may include a ‘performance fee’ that kicks in if performance targets have been exceeded.
Investment switching fee
if you ‘switch’ investment options in your fund (for example switching from a conservative to high growth investment strategy) because you are selling assets in one risk category and buying assets in another. Funds also refer to this fee as a ‘buy/sell’ spread fee, where the fee charged is the difference between the buy/sell price.
Exit fees no longer apply when you switch super funds. In 2019 the federal government legislated against the practice of charging you to exit one fund to join another, and those fees are now redundant.
The assessment of investment performance within a super fund should not be based on a single year’s returns. It is important to look at returns over the longer term, and if possible, ten years to get an accurate indicator of the fund’s long-term past performance.
It is also vital to consider risk-adjusted return, that is, the amount of market exposure to achieve a specific return. As risk profiles differ between super fund and investments (there is no legislated standard), a high return may not be an accurate representation of performance. For example, an investment that experiences large fluctuation (volatility, seen as the level of ‘risk’) to achieve an average 10% return, may be less desirable than an investment that experiences mild fluctuation but a more consistent 9% return.
Volatility, performance, performance against peers and investment philosophy of each fund is all publicly available information found online.
When choosing a fund, it is a good idea to have a clear understanding of what coverage may be available at startup (some funds may offer default cover), what cover you may apply for and what that means for your personal situation, as each fund differs in the insurance offered.
There are three main types of insurance that can be provided by super funds including:
Also called Death Cover, life insurance is coverage that pays beneficiaries in the unexpected event of your death or when you have been diagnosed with a terminal illness.
Total and Permanent Disability (TPD)
Sometimes referred to as disability insurance, TPD insurance provides a lump sum in the event of injury, illness or incapacity to assist with the associated lump-sum costs and to reduce the financial burden. It is advisable to read the product disclosure statement as TPD insurance held through super will only cover you for ‘any occupation’ , as opposed to ‘own occupation’.
Salary Continuance insurance
Salary Continuance insurance is designed to provide cover in the event of you being unable to earn an income over a certain time period due to illness or injury. Salary Continuance insurance typically pays up to 75% plus super of your pre-tax income for the coverage period, which helps you manage your cost of living while you are unable to work. This is particularly important if you have additional family commitments.
Under Australian law, super funds will cancel insurance on inactive super accounts that have not received any contributions for 16 months or more. Each fund will have their own rules that will dictate the cancellation of insurance on super accounts when super balances are too low – another important reason to consolidate any super funds you may have from previous employment.
And finally, while it may not be something you naturally consider when you first establish your super fund, you may choose to nominate a person to receive your super in the event of your death. This is known as the beneficiary of your super fund.
Once you have chosen a fund suitable for your medical career journey, the next step is to consider consolidating existing super into that account, as you may have accumulated super in different accounts throughout your employment history. You may also have funds referred to as ‘lost super’ that need to be tracked down.. The point of tracking lost super and consolidating it into a single fund is to avoid paying multiple sets of fees and to easily keep track of your balance and paperwork.
Transferring super to a different account is free and relatively simple, but it is important to check all payments (employer contributions) are up to date before you transfer super and ensure your new employer has details of the new super fund.
If you think you may have ‘lost super’ you can use the ATO’s website to search for unclaimed super.
The first thing to do when reading your super statement – whether you receive it online or in the mail – is to check your details are up to date including address and contact information, date of birth, tax file number and nominated beneficiary.
This shows opening balance, benefits paid and deductions.
- Opening balance: a good rule of thumb is the opening balance should at least equal or be higher than the closing balance on your previous statement.
- Benefits paid: this shows you what has been paid out of the fund including fees, tax on your contributions and insurances. If the fees seem unusually high, read the fund’s fine print relating to performance fees etc.
- Net earnings: this refers to the amount of money the fund’s investment has earned for you. Following deductions (any fees) the fund will deposit earnings into your account.
- Closing balance: representing the net (after tax) value of the fund at the end date of the statement period.
Factors to consider when choosing a Super Fund
Like starting your medical internship, the right super fund that’s suitable for your personal situation, goals and aspirations requires thought and focus. Factors that are considered when selecting a super fund can include:
- The different types of funds available
- Your appetite for investment risk
- If you have ethical considerations and what they are
- The fees associated with super fund options
- Insurance needs
- The value of your super
- Alignment with your goals
Using the assistance of a licensed financial adviser can help to make appropriate decisions around your super and the associated investments in conjunction with your needs.
Being confident you have an appropriate super fund allows you to plan ahead and focus all of your attention on your medical internship and the exciting and rewarding career path ahead, knowing when it comes to your financial health, an informed decision has been made regarding your super.
There’s always more to learn about super! For more information, you can browse our Knowledge Centre, or stay informed by subscribing to our newsletter packed with knowledge on financial services that is exclusively tailored to medical professionals.
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DPM also offers a DPM Intern Package which gives you unlimited access to the financial advice and support you’ll need as you transition from being a student to a doctor in training.
Alternatively, if you’d like to have a more in-depth discussion about superannuation or your investment options, click here to book an initial consultation with a DPM Private Wealth Consultant.
Disclaimer: * The information contained in this site is general and is not intended to serve as advice as your personal circumstances have not been considered. DPM Financial Services Group recommends you obtain personal advice concerning specific matters before making a decision.