Super: Vita Palestrant
High fees can eat away at retirement savings
Going into pension phase is a big deal. Suddenly, every dollar counts: gone are your regular salary and the super contributions that increased your balance. The challenge ahead, then, is to maximise what you have. You can’t control investment markets but you can control the fees that nibble away at your balance.
First, it’s worth giving yourself plenty of time to figure things out before you move into pension phase. That means reviewing your current fund to establish whether it will meet your needs in retirement.
Investment performance is obviously important but you also need to know that your fund is responsive and convenient to deal with. For instance, can you easily access your money in an emergency? If so, how does the fund stack up on fees compared with others that perform equally well.
Fees go up marginally when you move into pension phase. This is to reflect higher servicing costs. The three main annual costs to check are: the member fee, which is a flat dollar amount, plus an administration fee and investment management fee, both of which are percentage based.
The table from SuperRatings shows the difference in average fees for the industry’s two main players: retail funds, owned by the banks and insurers, and the not-forprofit sector such as industry funds. On a $250,000 balanced investment option, the average annual fee for a retail fund is $3621 versus $2244 for an industry fund.
Under these circumstances, you would need to establish whether the higher fees are worth it. Do they give you superior service and performance? If not, it’s time to look elsewhere and pocket the money yourself rather than hand it over to shareholders.
Kirby Rappell, general manager, research, at SuperRatings, says exit fees range from $66 to $188. “Partial one-off payments may attract a lower fee but at worst it would be the same size as an exit fee. The main exception is older-style retail products which have more complex withdrawal and exit fees.”
These are percentage based and can deliver a significant hit. “Some lapse at a certain age or anniversary date,” says Rappell. “If you have held the super product for 10 years, the fee may be waived.”
On top of the exit fee, there are transaction costs associated with selling out of your investments. “If the fund has buy/ sell spreads they would be about 0.05% to 0.30%, with a median of 0.12%,” he says.
People in large corporate plans are often unaware of the fee discounts they get, which cease once they retire. “We wouldn’t expect any fee discounts to be maintained when they stop working for their employers. This means they will pay the full administration cost rather than the discounted employer rate,” says Rappell. “It would make it worthwhile to look at other options to ensure they are getting good value.”
You can take your pension income fortnightly, monthly, quarterly, bi-annually or annually. The good news is there are no charges for regular payments.
But back to the emergency situation – how easily can you access your money? Do you face endless forms and phone calls? Rappell says it’s not as seamless as most people would like.
“Only 41% of providers allow you to make a partial withdrawal online and they might have a cap on the payment amount of, say, $10,000. Most funds provide access within three business days but leading funds would be similar to an online savings account. If you apply during the window today, you should have your money tomorrow.”
Colin Lewis, head of strategic advice at Perpetual Private Wealth, says it’s also important to consider what estate planning options are available. “It’s an opportune time to take stock, to review where you are, which fund you’re in, to see whether it’s right for you. When you kick off your account-based pension, how are you going to set it up from an estate planning point of view? Are you going to put in place a binding death benefit nomination in the event of death, or set it up as a reversionary pension?
“There’s a big difference because the reversionary means the income stream automatically continues to the spouse. They don’t have to do anything – they know the next payment will continue into the bank account as usual.”
For those with $1.6 million in an accountbased pension, the reversionary option is the better way to go because of the way it is treated on death, he says.