tax, superyou. take control. superhow do i choose activity 4 …€¦ · super funds invest your...

Tax, Super+You. Take Control.

Super Activity 4

HOW DO I CHOOSE A SUPER FUND?

Fact sheet

Years 7-10

Explore what factors affect super decisions and

calculate how much money you might need to accumulate in order to retire.

DECIDING ON A SUPER FUNDChoosing a super fund and choosing an investment strategy can be very important financial decisions. There are three broad factors you should consider:

� what type of fund to choose � the benefits/fees and costs of a fund � what investment strategy you should apply to your money.

WHAT TYPES OF SUPER FUNDS ARE AVAILABLE?There are five common types of funds.

Type of super fund

Features

Industry funds These funds are open to people working in a particular industry or under a particular industrial

award. Some industry funds allow anyone to join. Their features may be particularly suited to

workers in that industry.

Retail funds These funds are operated by financial institutions and are open to everyone. They allow a large

number of people and companies to operate their super arrangements as a single group.

Corporate funds These are generally open to people who work for a particular company or employer and are

usually tailored to meet the requirements of the particular company and its employees.

Self-managed super funds (SMSFs)

These are also known as do-it-yourself or DIY funds and are used by people who want to

create and operate their own super fund. It must have less than five members who are solely

responsible for the management and operation of the fund within a strict legal and regulatory

framework. They are generally unsuitable for people with small amounts of money.

Public sector funds These funds are provided by the government for public sector employees.

Each type of fund can have features that one person might see as a strength and another see as a weakness. For example,

a SMSF to one person might offer greater investment flexibility, but to another, it means too much responsibility and risk. You

need to consider which features are important to you when making your choice of fund.

Activity 4: Fact sheetPage 22


Investment mix Typical characteristics

Below are typical characteristics of different types of investment options within super.TYPES OF INVESTMENT OPTIONSSuper funds invest your money to grow your nest egg over your working life. Your super fund will invest your super in different types of assets, such as cash, bonds, Australian shares, property and international shares. Most super funds will package these assets into different investment options which have varying degrees of risk. Usually, super funds let members choose their investment options.

Below are typical characteristics of different types of investment options within super.

Source: Super investment options, MoneySmart

www.moneysmart.gov.au/superannuation-and-retirement/how-super-works/super-investment-options

Reproduced with permission of ASIC.

Activity 4: Fact sheet3


WHAT TO CONSIDER WHEN CHOOSING A FUND1. Fees and costs

All super funds charge fees. Every dollar paid in fees will reduce the amount in your super account. Super funds must show all significant fees in a table in the fund's product disclosure statement (PDS). These fees can make a large difference to the amount you accumulate over your working life, and hence the income you will have in retirement. Industry and corporate funds may be set up on a not-for-profit basis and they can charge lower fees. However, you should compare the costs with the returns — If a fund makes a higher return, it may be worthwhile to pay its higher charges.

2. Additional features Some funds will provide access to personal loans or the services of a financial advisor because they can obtain a group discount for members. Some funds allow you to open and make contributions to a spouse account. You need to decide whether these services are important to you.

3. Insurance cover Many super funds provide life and disability cover to their members. Super funds typically have three types of insurance for members:

� Death cover (also known as life insurance) - pays a benefit to your beneficiaries when you die, either as a lump sum or as an income stream

� Total and permanent disability (TPD) cover - pays you a benefit if you become seriously disabled and are unlikely to ever work again

� Income protection (IP) cover - pays you an income stream for a specified period if you can't work due to temporary disability or illness

You can usually increase, decrease, or cancel your default insurance cover. The insurance premium is paid through your super fund and the premiums are deducted from your super account balance.

4. Extra contributions Sometimes an employer offers to pay more than 9.5%, for example, when an employee joins the default fund. This might be worthwhile, but you should find out about the details of the fund first. For example, does the fund allow you to take advantage of the government's super contribution scheme?

5. Investment options and performance You can make your own decisions about how your super is invested.

Check the investment options available in your super fund. If you want the flexibility to change or concentrate on particular asset types, you need to check what the fund offers. Find out the returns the fund has earned for members over the last five or more years. Don't make a decision based on the performance of one year — you need to consider a longer period of time to get a better picture of how effectively the fund is performing.

MoneySmart provides advice on how to judge a super fund’s performance. Go to: www.moneysmart.gov.au and search 'judging a super funds performance'.

6. Regulation Check the super provider is licensed and complies with super rules and regulations. If the fund is complying, your money will get tax concessions. Individual funds must be able to provide evidence of whether they are complying. For more information about the super fund, check the Super Fund Lookup services at: www.superfundlookup.gov.au

SELECTING A SUPER STRATEGYMost super funds offer you a choice about which assets to invest your super in. When making this choice, super members should consider a strategy to manage their super and its performance, by considering available asset options and performance, risks, returns and their personal risk profile.

Remember, how a fund performs in one year is no guarantee of future

return.



Risk and returnSome assets, such as cash investments or fixed interest deposits, offer the potential for lower returns over time but provide less risk of the asset going down in value (known as a capital loss). Other assets such as shares are the opposite in that they offer greater potential returns but also a much higher chance of capital loss. The relationship between risk and return is often seen as positive – greater returns come with higher risk, while low returns mean lower risks.

You can use the compound interest calculator on the MoneySmart website as a guide to the expected rate of return. Go to: www.moneysmart.gov.au and search 'compound interest calculator'.

Differing rates of return on a final super payout

Rate of return over 45 years, reinvesting fund Start Finish

6% $10,000 $137,646

8% $10,000 $319,204

Difference over 45 years* $181,558

*Source: Compound interest calculator, MoneySmart, Reproduced with permission of ASIC.

Know your risk profileGenerally, the higher the risk you take with your investments, the greater the return you would expect. Not everyone is comfortable with taking such risks, and they will choose a lower return, but with less risk. The diagram illustrates this relationship.

Relationship between returns and risksIt is important for you to work out your risk profile. You need to know how you feel about risk to be able to select an investment option that meets your needs.

Someone who has a long time to invest will often accept higher risk. As you approach retirement age, you are closer to withdrawing your super and you want to be sure about the amount of super you will have. Your risk tolerance may fall sharply. Remember, at retirement your super may need to last another 25 to 30 years.

Do you feel

comfortable when you risk potential loss in order to hopefully gain

higher returns? INVESTING IN YOUR FUTURE

Compound interest and your investment options will determine your future. The magic of

compound interest means your super account

will grow while you work as your employer continues to pay a contribution into your account. The more money you contribute early

on, the more money you will have when you

retire. Also you can consider the investment

options offered to you by your fund. Your choice

of investment can have an impact on how much

money you have down the track.



TASK 1 MAKING A DIFFERENCE TO MY SUPERSuper Activity 4: How do I choose a super fund?

Worksheet

Years 7-10

YOU WILL: � interpret data to develop conclusions about how different

actions impact on super � draw conclusions about factors that affect super fees � draft a plan for a text designed to inform youth about

actions they could take to improve their retirement

YOU WILL NEED: � Fact sheet: How do I choose a super fund?

There are many decisions you can make that will impact the amount of superannuation you have for retirement. These include:

� making contributions sooner � earning a higher income � delaying retirement � making payments to your superannuation through salary sacrificing (before tax) � the fees charged by your super fund � the investment performance of your super fund.

The superannuation estimates and fees in Tables 1-6 were calculated using the MoneySmart Superannuation calculator (www.moneysmart.gov.au ). Tables 1-4 assume an 8% annual investment return and a 1% contribution fee.

INTERPRET DATA TO DEVELOP CONCLUSIONSIn this task, you will interpret projected superannuation amounts at retirement based on these decisions.

Table 1: The effect of superannuation guarantee being paid earlierJane Miguel Sunil

Age now 20 25 35

Age at retirement 67 67 67

Super accumulated now $5,000 $5,000 $5,000

Annual salary $50,000 $50,000 $50,000

Fees paid $22,278 $17,159 $9,819

Estimated super (after fees) $834,380 $643,290 $369,314

1. Conclude: What conclusions can you make about having super guarantee paid by your employer at a younger age? Use statistics to justify your conclusion.

Activity 4: Task 1Page 26


Table 2: The effect of earning a higher incomeKwong Pearl Ali

Age now 23 23 23



Annual salary $40,000 $60,000 $80,000

Fees paid $17,692 $20,446 $23,199

Estimated super (after fees) $576,671 $852,498 $1,151,525

2. Conclude: What conclusions can you make about the effect of earning a higher income? Use statistics to justify your conclusion.

Table 3: The effect of delaying retirementTim Thomas Tanya

Age now 23 23 23



Annual salary $50,000 $50,000 $50,000

Fees paid $19,069 $21,160 $24,673


3. Conclude: What conclusions can you make about the effect of delaying retirement on superannuation? Use statistics to justify your conclusion.

Table 4: The effect of making additional payments above your employer's 9.5% contributionRosa Will Vince

Age now 23 23 23



Annual salary $50,000 $50,000 $50,000

Make voluntary contribution (before tax salary sacrifice $ amount per month)

$60 $120 $180

Fees paid $19,930 $20,791 $21,653




4. Conclude: What conclusions can you make about the effect of earning a higher income? Use statistics to justify your conclusion.

Table 5: The difference fees can makeFund A Fund B Fund C

Age now 23 23 23



Annual salary $50,000 $50,000 $50,000

Contribution fee 1% 2% 3%

Fees paid $19,069 $25,953 $32,837


5. Conclude: What conclusions can you make about the difference fees can make? Use statistics to justify your conclusion.

Table 6: The difference super fund performance can make

Fund A Fund B Fund C

Age now 23 23 23



Annual salary $50,000 $50,000 $50,000

Contribution fee 1% 1% 1%

Fees paid $14,660 $19,069 $25,029

Average annual performance 7% 8% 9%




The statistics on the previous page show how the performance of 3 different super funds affects estimated super at retirement. When selecting a super fund, it is important that you compare the performance of each fund over at least 5 years and consider the charges applied to the fund.

6. Conclude: What conclusions can you make about the difference super fund performance can make? Use statistics to justify your conclusion.

7. Look at the fees that different individuals paid on their superannuation in Tables 1-4 and Table 6. A contribution fee of 1% was charged on each superannuation account. What conclusions can you make about the impact that the following has on the fees charged:

a. the time the super fund has been in place b. the value of the super fund.

Use evidence from the tables to justify your conclusions.

CREATE AN INFORMATION TEXT OR INFOGRAPHIC8. Use the conclusions you have made from your interpretation of the data above to plan a flyer or infographic promoting the action

young people could take to maximise their super.



DRAFT IDEAS



TASK 2 DECIDING ON A SUPER INVESTMENT STRATEGYSuper Activity 4: How do I choose a super fund?

Worksheet

Years 7-10

YOU WILL: � identify the criteria that influence superannuation investment

decisions � identify the financial risks and rewards of different

superannuation investment asset options � conduct a cost-benefit analysis of superannuation

investment strategies � design and justify a course of action to achieve given

retirement goals

YOU WILL NEED: � Fact sheet: How do I choose a super fund?

In this task, you are to conduct a cost-benefit analysis of different superannuation investment options to propose a course of action for two hypothetical clients. You will then identify financial risks and rewards of different superannuation investment options, and match these to your hypothetical clients’ circumstances. You will then create and justify advice about a course of action for each client to achieve their retirement goal.

Advice should acknowledge the client’s:

� retirement goals � stage in life � risk profile � available funds � investment options.

ScenarioYou are a qualified financial advisor for a reputable financial planning company. You have two clients, with unique circumstances, each seeking superannuation advice. Having gathered information about their risk profiles and goals, your task is to analyse each client’s circumstances and propose a course of action for superannuation investment over the short, medium and long-term, to assist them to meet their retirement goals.

DECIDE A COURSE OF ACTION

Client AClient A is a 24 year-old nurse, early in her working career. She has been earning about $70,000 a year but expects her salary will increase with experience. She also has overtime opportunities and thinks her salary could reach $95,000 next year. She is not a risk-taker although she wants to make the most of her superannuation.

She believes she has a long-term career in nursing and is interested in soon working overseas for some years. Later, she hopes to have a family. She assumes she will not be eligible for a government pension when she retires. However, by retirement, she would like a comfortable life that includes overseas travel.

Her employer pays her super to an industry fund. The fund is known to consistently perform well, although the fees and charges can be high. The fund packages its investment asset types (cash, fixed interest securities and shares) into four options — growth, balanced, ethical and conservative.

Client BClient B is a plumber, aged 60, who is currently earning $85,000 a year. He is planning to retire at 65. He has been contributing to super since he began work. He currently has enough for a very modest retirement.

By nature, he enjoys action sports such as skiing and skydiving. But he hopes to enjoy a quiet retirement life with his partner who has very little super due to mostly unpaid work in the home. They hope for a modest to comfortable lifestyle in retirement.

While he has had no breaks in his career, he has not volunteered extra payments. He has worked for four employers in his career and his super is in three different super funds, two of which are industry funds and one being a retail fund. The industry funds charge few fees but they are high and the retail fund charges many types of fees, which are not too high. One of the industry funds is performing better than the other two funds. The fund packages its investment asset types into three options — high growth, balanced and conservative.

Identify the objective



Your process will involve:

1. creating a client profile2. deciding a super investment strategy using a cost-benefit analysis3. proposing a course of action to inform an investment strategy4. writing an evaluation of your course of action proposal.

Create a client profile1. Create a profile to understand the unique circumstances of your clients.

Client AA nurse aged 24

Client BA plumber aged 60

Clients’ goal/s for retirement

Client’s stage in life

Client’s financial risk profile (low, medium, high)

Client’s available super funds and their type



Decide a super investment strategy using a cost-benefit analysis2. Analyse the risks and rewards (costs and benefits) of different investment strategies with the clients in mind.

Client AA nurse aged 24

Client BA plumber aged 60

Super investment asset types/investment options available to client

Potential risk/s of the investment options

Potential reward/s of the investment options

Potential risk/s in the client’s life events

Potential reward/s in the client’s life events

Possible suitable super investment option/s for:

� short-term � medium-term � long-term



Propose a course of action to inform an investment strategy3. To help your clients make investment decisions, use the template below to show investment advice including objectives, investment

options (asset type combination), short, medium and/or long-term strategies, and expected outcomes. Justify your advice.

Short-term objective/s

Strategy: Investment option/s

Expected outcomes

Justification for these conclusions

Retirement goal

Medium-term objective/s


Expected outcomes


Long-term objective/s


Expected outcomes


Client A: Course of action



Client B: Course of action

Short-term objective/s


Expected outcomes


Retirement goal

Medium-term objective/s


Expected outcomes


Long-term objective/s


Expected outcomes




Evaluate your course of action proposal4. Write a paragraph that describes your proposed course of action for Client A and evaluates how effectively your proposed plan

meets Client A’s goal. Do another paragraph for Client B.

Alternatively, write a comparative piece explaining why your courses of action vary for Client A and Client B.

DESCRIPTION (OR COMPARISON) AND EVALUATION OF COURSES OF ACTION


tax, superyou. take control. superhow do i choose activity 4 …€¦ · super funds invest your...

Documents