Last month the Australian Prudential Regulation Authority (APRA) announced 13 superannuation funds whose MySuper offerings had failed the new annual performance assessment introduced in the Your Super Reforms. These funds will be required to write to their members by 27 September 2021, advising of their poor performance.
The names of the funds were well publicised, which led to a flood of emails asking for advice about what to do if you found yourself in one of them. It's certainly a wake-up call - you should thoroughly examine your superannuation, and improve it any way you can, but it is probably worth waiting to see if you receive a letter from the fund before taking drastic action.
The reason is that some of the funds named as under-performing are offered by some of Australia's major fund managers and many of their other products may be performing quite well. Don't panic just because your fund manager is on the list, wait for the letter and then decide.
MySuper funds are the default option for members who have not yet chosen what to do with their super. A major finding of the Cooper inquiry into superannuation was that 80% of fund members are "disengaged". It's time to get engaged.
If you don't, you will forfeit earnings you could achieve by taking a little time to seek out a better performing fund or to choose asset classes that suit your risk tolerance and timeframe. If you are in a poor performing fund, it's likely you will want to move it to a fund with a better record. But there are a few details you must check carefully before jumping ship. Keep in mind if you have insurance in your existing fund, it will be cancelled if you transfer to a new fund. Before you change funds, make sure the new fund can insure you on acceptable terms. If it's not possible to find insurance on acceptable terms, you may be better off staying with your existing fund.
The APRA announcement is a wake-up call to get engaged with your superannuation. The major factor that determines how much money you will have in superannuation when you retire, and how long your money will last after you retire, is the rate of return your super fund can achieve. If you're under 45 you should be investing in high growth funds, and if you're over 45 a mix of high growth and balanced funds will usually suit you.
For a good learning experience, go to my website www.noelwhittaker.com.au and play with the Superannuation Contributions Calculator, which lets you model various scenarios based on various rates of return. Over 30 years, a change of rate could make a huge difference -over $1 million.
Apart from working out ways to increase your rate of return, consider strategies to improve your financial situation in the most tax-effective way. If you are over 50 and have a mortgage on your home, you should aim to retire with sufficient funds to pay off your mortgage. One of the best ways to do this is to maximise the tax-deductible contributions you make to your superannuation. Such contributions lose just 15 per cent tax (30 per cent for high-income earners) which is paid within the fund, whereas after-tax funds (the ones used to pay down your mortgage), lose tax at your full marginal rate. Making pre-tax contributions is usually the best way to boost your super.
NOEL ANSWERS YOUR MONEY QUESTIONS
My employer sent me a letter with Base Salary and Super component. Last financial year my base salary was $111,388 and super was $10,581. This year my base salary is $110,881 and super is $11,088. This supports the new 10 per cent super contribution. Is it right my base salary decreases as my super goes up?
It appears you have an inclusive package, not a package with a base salary plus superannuation. If your package is based on total remuneration including super, then the amount you will receive in your pay packet will reduce if the super component increases. It's a matter to negotiate with your employer.
My wife and I are self-funded retirees in our early 70s; our living expenses come from our Account Based Pensions and rental incomes of an investment property bought in 1996 outside our SMSF. Should we sell the investment property now (assuming we can do without the rental incomes) or keep it and pass on to our children in our estates.
A major question here is the potential of the property. If you think it's got good potential I see no point in selling it and incurring unnecessary CGT. Keep in mind that death does not trigger CGT - it defers it. The beneficiaries will only pay CGT and when they dispose of the asset. Also you need to think about your children's position and whether they would prefer to have the property bequeathed to them and then keep it, or whether they would rather it sold so they can have the proceeds for their own individual needs. If the latter is the preferred option, you should take advice to find out whether it's better for CGT purposes for the assets to be sold before your death, or by the estate.
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Recently you spoke about the difference between gifts and loans to help your children and that a strict legal time limit applied when recovering loans which are repayable on demand. Does this mean if you loaned the money on the July 1, 2014 and then requested it back on July 3, 2020 it would be illegal as the time frame had exceeded six years?
The law may differ from state to state so individual legal advice is critical. Elder lawyer Brian Herd points out there is nothing illegal about a loan repayable on demand or to seek to recover it after the time limit has expired. However, the debtor may raise the defence that the claim is 'out of time' which is usually a good defence. It is possible to seek an extension of time from a court, but you need to have a good reason why it should be granted and is difficult to establish. Ignorance of the law, as they say, is usually no excuse.
- Noel Whittaker, author of Retirement Made Simple and other personal finance books. Email: firstname.lastname@example.org