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Wednesday, 4 June 2014

Beware "low" fees on Superannuation accounts

While the Australian Superannuation system has a lot of good features (practically universal coverage, tax advantages in exchange for preservation until retirement age, providing some mitigation of the impact of the aging population on the cost of the aged pension system, encouraging workers to plan for their retirement, and a reasonable rate of enforced savings of current salary income towards retirement) it also has some bad features (such as complex tax rules, changes to rules over time eroding confidence in the system, the tax benefits being negligible for below AWOTE workers, and the biggest tax benefits being available to those who probably wouldn't get the aged pension in any case and don't need any encouragement to save for their retirement - for example the ability to make a $150K pa 'after tax' contribution into superannuation provides a 15% tax rate environment to high income earners who would otherwise be exposed to the top marginal tax rate on investment income if it was invested outside of the superannuation system). And one of the worst features is the often excessive fees charged by superannuation fund administrators (especially the 'retail' funds).

A side effect of the generally outrageous fees charged by superannuation funds is the growth of so-called "low fee" funds that many retail funds have set up to stem the flow of superannuation savings away from retail funds and towards Industry (trade union) superannuation funds and self-managed superannuation funds (SMSFs). However, not all "low fee" funds are particularly good value! As a random example I had a look at the Suncorp Everyday Super Fund that is advertised as being a "low fee" superannuation fund.

Suncorp Everyday Super charges an administration fee of $1.50 per week plus 0.65% of your balance. And for the Suncorp Lifestage Fund investment option there is an 'Investment Fee' of 0.2%.

While 0.65% admin fee is certainly a lot lower than many retail funds (some charge around 1.50% administration fee), it still can excessive for anyone with a signficant amount accumulated in their superannuation savings. For example, with my current superannuation balance of around $600K, a 0.65% 'admin' fee would cost me $3,900 every year! By comparison, our SMSF administrator charges $699 pa for admin (including audit report costs), and even with the extra SMSF 'supervisory levy' charged by the ATO (a ridiculous $259 from 2014), the total 'admin' cost of $958 for our SMSF is less than 0.15%.

The 'sticker' cost of 0.2% Investment Fee for the Suncorp Lifestage Fund may appear to offset some of the higher admin costs, given that in our SMSF the Investment Management Fee charged by Vanguard for the LifeStrategy HighGrowth (Index) Fund is around 0.4%. However, drilling down into the Suncorp Lifestage Fund 'Profile' reveals that there is a 0.85% 'Management Fee' embedded in the Lifestage Fund.

So, overall, putting $600,000 into a SMSF and investing in a 'growth' index fund investment option would cost around $3,458 pa, whereas having the same amount in the 'low fee' Suncorp Everyday Super Fund and invested in the Lifestage Fund would cost you $1200 'up front' as an Investment Fee, and then an annual cost of around $9,000. A difference of over $5,500...

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Net Worth: May 2014

The net value of my geared stock portfolio, retirement account (SMSF) and home all increased during the past month, resulting in a solid gain in overall net worth estimation. The retirement account gain was largely due to 5 months of employer contributions (Jan to May) all being deposited into our SMSF bank account during May.

Normally employer contributions for each quarter (eg. Jan, Feb and Mar) and due by the end of the month following the quarter (eg. Apr), and take a week or more to be processed by the Company Superannuation administrator (BT Super) and arrive in our bank account (eg. early May). The HR department had been talking about making the superannuation payments monthly, which accounts for the Apr and May payments being processed in May as well. Fortunately my age and current superannuation rules regarding concessionally tax contributions mean that even with 2-3 months extra payments being processed in the current financial year I wouldn't exceed the contribution cap.

Recent Sydney real estate index figures from RP Data are showing a slight decline in house prices, so the estimated valuation for my half of our home is likely to decrease slightly over coming months (my estimation used a moving 12-month average price guide for our postcode, rather than the daily Sydney Index value). As usual, I don't include assets or liabilities belonging to DW, DS1 or DS2 in my personal net worth figures.

Assets$ Amount$ Diff% Diff
Stocks *$245,086$9,583n/a
Retirement$602,386$11,0391.87%
Home$496,457$9,3281.91%
Farm$325,000$325,000n/a
Debts ^$ Amount $ Diff% Diff
Home Mortgage(s)$102,358-$7-0.01%
Net Worth$1,566,571$29,9571.95%
* the Stocks figure is portfolio value - margin loans. The LVR is around 80% overall.
^ doesn't include the ~$675,000 of investment loans, as these are already deducted when calculating the value of my geared stock portfolio.

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