If you’re in the market for a super pension, it’s tempting to stick with what you know and use your existing super fund, but you could be short-changing yourself.
Of course, low fees and good investment returns are as important for a pension account as they were when you were accumulating super savings, but there is a lot more to selecting the right retirement product.
Whether you’re looking for your first pension, considering changing providers or wanting to add another retirement income product to your existing solution, the following tips are designed to help you make a choice that could set you on the right track for life.
Step 1: Select the type of pension you want
With life expectancy continuing to increase, the risk of running low on savings in later life is front of mind for many people.
When choosing a pension product (or products), consider whether your priority is guaranteed lifetime income, the flexibility to set your own payments and withdraw lump sums as needed or a mix of both.
Using a lifetime pension for at least part of your savings could improve your Age Pension entitlements, with only 60% of the purchase price assessed as an asset, and 60% of income payments counted in the income test. When you reach 84 and have held the product for a minimum of five years, the amount counted in the assets test reduces to 30% of the product’s purchase price.
A lifetime product is often used in combination with a simple account-based pension so you can enjoy both guaranteed income (from the lifetime pension) and the flexibility to change annual pension payments and make lump sum withdrawals as your needs change (in the account-based pension). You can hold both types with the same super fund or with two different funds.
Step 2: Look for a transfer bonus
The one good reason to stick with your current super fund into retirement is that it might offer you a transfer bonus. While the name of this boost varies from fund to fund (it’s often called a ‘Retirement bonus’), the concept is the same.
The bonus is a refund of money that has been set aside to pay tax on capital gains that are expected to occur in the future – when assets that have increased in value are sold.
When you move your money into the retirement phase from an accumulation account or transition to a retirement pension and retain the same investment option, the obligation to pay this tax is removed. The assets are moved into the tax-free retirement phase, and when they are sold, there is no tax on the gain. This means the money that was set aside to pay tax can be returned to your account.
If you have a large balance, the value of the transfer bonus can be significant, so it is worth keeping in mind. Some funds cap the bonus they provide, and others don’t.
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Find out moreNot all funds offer this feature. If retirement is still a while off, it’s worth checking whether your fund pays a transfer bonus or has a competitive pension offering. If not, there’s time to switch to one that does.
You may be required to be a member for a year or so before converting to a pension to be eligible for a boost – because it takes time for money set aside to pay tax on your future capital gains to accumulate. Generally, the longer you have been a member of the fund and in the same investment option (or mix of options), the bigger your boost will be.
The investment return you receive throughout retirement usually makes an important contribution to your income level and how long your savings last.
Are you a highly engaged and educated investor who wants the option to invest directly in listed shares and exchange-traded funds (ETFs)? Or are you happy to leave selecting individual investments to the experts with a fund that offers a suite of premixed options? Wherever you sit on the spectrum, there should be a pension product offering what you’re looking for.
If you’re considering a bucket strategy to draw income from more stable assets while the remainder of your pension is invested more aggressively, there are even products available that can manage it for you, so you’re not required to continue making active investment decisions throughout your retirement. Our research uncovered EquipSuper, Brighter Super and VisionSuper as funds offering this service.
If you will be using some of your savings to invest in a lifetime pension that is not linked to investment markets, you won’t need to select an investment strategy for that portion.
AustralianSuper offers a similar option they call ‘Smart Default’, part of their Choice Income pension account. This places 12% of your initial investment in the Cash option and 88% in a Balanced option. Your pension payments are drawn from Cash until there is no balance remaining, after which payments will come from the Balanced option. Your annual pension payment starts at 6% of your balance and begins to increase once you turn 80. This is similar to a bucket strategy but doesn’t top up your Cash bucket after it is depleted. This means that unless you change your investment strategy in future, your whole balance will be exposed to the Balanced option after a few years.
If you’re a more active investor and want to choose your own mix of shares and ETFs, the funds we found that offer this type of ‘member direct’ investment are AustralianSuper, CareSuper, CBUS, HostPlus, HUB24 (through an adviser only), ING, IOOF Personal Super, LegalSuper, Mercer and Superhero.
Step 4: Review fees
A low-fee pension product might charge a dollar-based administration fee of around $70 per year plus a percentage-based administration fee under 0.2% of your balance.
In addition, there will be costs associated with managing your investments. These are not shown as transactions on your account but do reduce your investment return. Low investment management fees for actively managed options can range from 0.1% for cash to 0.8% for a high-growth portfolio (invested mainly in shares, property, derivatives and other alternatives). Indexed portfolios are even lower cost.
Step 5: Check the performance history
If you have decided to invest some or all of your balance in a simple account-based pension, then investment performance is critical. Good returns can potentially outweigh the regular pension payments that are being withdrawn, allowing your balance to continue to grow even after you have retired and begun to live on it.
SuperGuide provides the following rankings of pension fund performance that can help you to compare:
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Find out more- All Growth (96–100% growth assets)
- High Growth (81–95% growth assets)
- Growth (61–80% growth assets)
- Balanced (41–60% growth assets)
- Conservative (21–40% growth assets).
The rankings above relate to premixed diversified options that contain a mix of assets. If you’re interested in comparing single sector options (international shares, property, etc), visit the websites of the funds offering the products you’re considering to find long-term returns for their pension division.
If you’re considering an investment-linked lifetime product, the provider can direct you to performance history. You may or may not have the option to choose your own investments, depending on how the pension operates. Performance will affect how your income from the pension changes over time.
Some lifetime pensions don’t offer investment choice, and investment performance is only important for the provider – you receive the same guaranteed income no matter what.
Step 6: Investigate how payments are offered
Payment flexibility varies more than you’d expect. Some products pay as often as fortnightly, others less frequently, so check what’s on offer if regular income matters to you.
It’s also worth knowing how often you can change your annual payment amount, and whether there’s a fee to do so. For additional lump sum withdrawals, check if there are associated fees, how long a payment takes to process and whether there’s a limit on free withdrawals each year.
You’ll find all of this in the product disclosure statement (PDS).
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Step 7: Test the member services
It’s worth taking a careful look at services offered by the pension providers you’re considering. You may be able to access limited financial advice at no extra cost, or for a small fee.
Look at their website to see how simple it is to navigate and what education materials are available to help you.
Give their contact centre a call to check what their waiting times are like and how easy it is to get through to speak to a representative if you need them.
How to move your pension to another fund
If you’re not happy with your current super pension, you may be able to move it. Simple account-based pensions can be shifted at any time. But if you have a lifetime product, it could be stuck where it is, so check with your provider to be sure.
For a simple account-based pension to be rolled over to a new fund, the pension must first be stopped (commuted). If you don’t already have an accumulation account with the fund holding your pension, you may need to apply to open one to accept the balance of your closed pension.
Some super funds are user-friendly enough to ‘fill in the gaps’ and take care of commuting your old pension and then rolling it over for you based on a simple request to transfer a pension to a new fund. Others require a specific request for each step.
To avoid processing difficulties, follow this process to move your account:
- Open an accumulation account with your current super fund (if you don’t already have one).
- Close your existing pension and move it to your accumulation account with your current super fund.
- Apply to open a new pension with your chosen super fund, indicating where your investment is coming from (your new provider will often take care of transferring the money from your old fund for you).
- Check that your new fund is arranging the transfer. If not, apply with your old fund to roll over your balance (or the portion you want to move) to your new pension.
Alternatively, check with your current provider if they will process a transfer request from your new fund without the need for you to jump through these hoops.
There is one exception to the requirement for a pension to be commuted before it can be rolled over. A death benefit pension (paid to you as a beneficiary after another person’s death) must be directly transferred to a new fund if you request to move it.
The difference comes about because of a rule called ‘compulsory cashing’ for death benefits, which means the amount can’t be transferred back to the accumulation phase once payments have started.
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