What to consider when choosing a fund

The nest egg your superannuation builds up throughout your working life may need to last you over 20 years or more, so choosing the right fund for you is important.

We've put together our top 5 tips you may wish to consider when choosing a super fund.

1. Fees

   Small differences in fees and costs can have a substantial impact on your savings when you retire.

2. Investment options

   Two questions you may ask yourself when choosing an investment option are:

   • How hands on do I want to be with my superannuation?
   • What level of risk would I be comfortable with?

   To find out more information on considering risk, go to the 'Considering risk' tab.

3. Investment performance

   Superannuation offers good potential to grow your money over longer time periods. Since returns can rise and fall in shorter periods of time - sometimes in one day - it’s important to look at fund performance in the bigger picture.

   It's also recommended not to look at it in isolation - other factors such as fees, investment options and insurance benefits can all affect your account growth.

4. Additional benefits

   Combining superannuation with insurance means your insurance payments come straight out of your superannuation account

   Since premiums are paid with after-tax dollars, it could be more tax-effective than if you were to pay from your personal savings. And because superannuation funds often buy insurance in bulk, insurance can be cheaper for you when compared to direct coverage.

   Combining the two also gives you one less bill to worry about paying and means the same people who help you look after your nest egg cover you for income, disablement and death.

   So when choosing a fund, consider whether you'd like your superannuation and insurance under the one roof.

5. Account access and customer service

   For those who prefer to be more hands on with their superannuation, easy account access and customer service is crucial. For those who'd rather a 'set and forget' type approach, access and service are often things that aren't really missed… until they're needed.

   So when choosing a superannuation fund, it's important to consider whether you can easily access your account and if a customer service team is available to you.

You should consider our Product Disclosure Statement which can be found on our website. Please note this information does not constitute personal financial product advice, and you may wish to consult your financial adviser before making a decision about whether Virgin Superannuation fits your objectives, financial situation and needs.

Considering risk when choosing an investment option

Superannuation funds often give you a choice between investment options. When choosing, you may want to consider the level of risk you’d be comfortable with.

If an investment option carries a higher level of risk, it means you generally have the potential to see higher returns over the long term. In the short term, it's important to note that investment options with higher level of risk have a higher potential to experience negative returns.

The graph below shows the investment risk and growth prospects that can be expected from each asset class over the long term.

Q. What are the different types of risk that can apply to superannuation funds? A.

• Investment risk – all investments have the potential for fluctuating returns. Generally, the higher the risk, the higher the return. However the higher the risk, the higher the probability is for a negative return.

• Market risk – this includes universal factors such as economic cycles, government policy, interest rates and inflation. Changes in these factors may result in dramatic increases or decreases in market valuations.

• Currency risk – the risk that movements in foreign currency will affect the domestic value of overseas investments.

• Legislative risk – changes in legislation (such as superannuation and taxation laws) may affect your investment.

• Fund risk – the risk of your fund terminating.

• Liquidity risk – the extent to which investments can be converted into cash or other liquid securities without suffering a substantial reduction in value. This risk may arise in circumstances where in order to liquidate an asset quickly, it may be necessary to sell that asset at a substantial discount and so have a negative impact on the overall performance of the investment.

About asset classes

Many superannuation funds invest in assets. So when deciding on an investment option, it might be helpful to understand the different levels of risk and returns associated with the different asset classes.

Some assets carry a higher level of investment risk than others - these are known as growth assets (e.g. shares and property). Those that are more stable are called defensive assets (e.g. cash and fixed interest).

How to get the balance of risk right
By spreading your investment among different asset classes (also known as diversification), you may be able to reduce the overall level of risk in your portfolio.

Generally, it's not possible to diversify all risk but spreading your investment over a mix of assets may help smooth out the ups and downs of an investment.

Super and tax

You may have heard that superannuation can be a tax effective way of saving for your retirement. That’s because the government can offer a number of tax incentives for superannuation, depending on your personal circumstances.

1. Tax on contributions or other amounts

   You could be subject to additional tax (directly) if contributions you make exceed limits on concessional and non-concessional contributions.

   Concessional contributions include deductible employer and self-employed contributions.

   Non concessional contributions include member (after tax) contributions.

   A concessional tax rate of 15% can apply to concessional contributions up to $25,000 per person per year for the 2009/2010 financial year (subject to indexation). Transitional arrangements apply, up until 30 June 2012, for those aged 50 or over on the last day of a financial year allowing concessional contributions of up to $50,000 per person per year (not indexed). Concessional contributions in excess of these limits incur an additional tax of 31.5% payable directly by the individual member (this amount may be released from a super fund upon presentation of a release authority issued by the ATO.

   Non-concessional contributions are limited to $150,000 per person per annum (for 2009/2010 financial year). People aged under 65 in a financial year can bring forward 2 years of future entitlements averaged over a three year period, giving them a cap of $450,000 over a three year period. People aged 65 and over can make non-concessional contributions of up to $150,000 in each financial year, provided they satisfy the work test for each relevant year. The $150,000 cap will be indexed in future years so it’s always six times the cap on concessional contributions.

   Non-concessional contributions in excess of these limits incur tax at the rate of 46.5% payable directly by the individual person (this amount must be released from a super fund upon presentation of a release authority issued by the ATO).

2. Tax on money paid to you

   If your super is taken in the form of a lump sum benefit payment, tax may be payable dependent on your age and the make-up of your super payment components. If tax is payable, the Trustee is required to withhold the tax amount from your payment and provide you with a payment summary for your tax return.

   Tax won’t apply to super benefits if paid from a taxed source to a member aged 60 or over (whether paid as a lump sum or pension).

   Tax will be payable on the taxable component of super benefits paid to members aged under 60. Lump sum payments from a taxed source consist of only two components:

   • A tax-free component made up of non-concessional contributions, as well as other concessionally treated components such as the pre 1 July 1983 component, undeducted contributions, CGT exempt component, post June 1994 invalidity component and concessional component (crystallised as a dollar amount as at 30 June 2007) which may form part of a rollover or transfer that you make to Virgin Super); and
   • A taxable component made up of the total super benefit, less any tax-free component.
   Generally if your super fund has your TFN, the taxable component will be taxed at 20% (plus Medicare levy) if paid to a person under their preservation age or 15% (plus Medicare levy) on any amount over $150,000 (for the 2009/2010 year) if paid to a person from preservation age to age 59 (amounts under $150,000 will be tax free). For the 2010/11 year the threshold is $160,000, subject to indexation in future years. A higher tax (marginal tax rate plus Medicare levy) applies if your super fund doesn’t have your TFN.

   Payments from a taxed source to temporary residents departing Australia are treated differently (the taxable component will generally be taxed at 35%).

3. Tax on Investment Earnings

   Any earnings you receive from super investments are taxed at a maximum ‘concessional rate’ of 15%, which is generally lower than other forms of savings. The effective tax rate may be less after deductions or other credits are taken into account.

4. Tax on Death, Terminal Illness or Disablement

   All lump sum death benefit payments made to a dependant are tax-free. Death benefit payments to non-dependants will have to be made as a lump sum. Lump sum payments to non-dependants (irrespective of their age) are usually be taxed at up to 15% (plus Medicare levy). Lump sum death benefits may include an untaxed amount if they include insured amounts for which a tax deduction has been claimed (untaxed elements attract higher tax).

   A non-dependant for this purpose includes an adult child aged 18 or more unless financially dependent or interdependent. Where a death benefit is received by the legal personal representative of a deceased estate, tax is determined according to who is intended to benefit from the estate. A terminal illness benefit (which meets the requirements of the tax legislation) will be tax-free. A Total and Permanent Disablement (TPD) benefit t paid to a member is generally taxed as a lump sum super benefit t (see tax rates for lump sum payments above). For Income Protection, payments received by a member will be taxed at his/her marginal tax rate.