The Importance of Choosing the Right Superannuation Plan

The tertiary sector is part of the economy that provides services to the people such as hotels, learning institutions, taxi services, etc. A developed economy constitutes three segments namely the primary, secondary and tertiary sectors. The tertiary sector in Australia constitutes 75% of the country’s economy (Rosalie, Colin, & Ian, 2002). Superannuation is a measure put in place by the government to ensure people save money on their income, which will be paid to them monthly when they retire. This is meant to reduce the dependence ratio and ensure that retirees still enjoy life after retirement and have a monthly income to cater for their needs. Defined benefits plan are corporate funds in which the value of one’s retirement benefits is dependent on some factors. Namely, the amount of money contributed by an individual’s employer and the individual, duration of employment and salary upon retirement (Christine, 2015). Investment choice plan allows an individual to determine where their superannuation funds are invested be it the growth, conservation, cash or Australian shares options. It is essential for tertiary sector employees to choose the most appropriate superannuation contribution plan that works best for them. Their choice is based on the various factors discussed below.

Fees

            It is advisable to choose an account which is affordable as per an individual’s income. Most employed people have a lot of monetary obligations such as supporting their children, paying rent, etc. Superannuation funds are compulsory to every working individual hence cannot be evaded. The benefits differ as per the accounts which might tempt someone to subscribe to an account which has greater benefits. It might be uneconomical to lower income earners who might end up straining to pay the premiums. The different accounts might end up being almost similar differing slightly in benefits which is advantageous to some individuals who will still get an account which requires lower premium with amazing benefits. In case a plan doesn’t work for someone there is always an option of changing the plan. Choosing a plan that has competitive fees is advantageous; the difference might be a small percentage which will make a huge difference in the amount of money accumulated at the end of the plan which is a long time.

         There are various forms of fees that are payable to a superannuation plan mainly categorised as primary and secondary fees (David, 2014). A membership fee is usually charged on a weekly basis, and it ranges between $1 and $5. Administration fees are charged for managing the superannuation accounts; it covers the cost of sending the statements to the accounts. The management fee is used to manage the different investments associated with an account. The performance fee is paid to managers with outstanding performance above their set targets as an incentive. Contribution fee is paid when an account is credited with a contribution; the money is used to cater for administering the fees.

            Adviser service fees are commissions paid to advisors for the recommendation of investments in case their services were required before opening an account. The secondary fees are relatively lower that the initial fees and they include: establishment fees, investment switching fees, termination fees, etc. The fees for the fund’s plan should be comparatively low as compared to other plans. That would save money spent in opening an account. The prices should be well indicated on the plans such that an individual knows the cost of opening and maintaining a fund account.

Risk of Superannuation Funds

            The two types of superannuation funds differ in price significantly. Incomes for individuals vary, hence the various types to accommodate everyone. Both the defined benefits plan and investment plan have multiple kinds of funds. They include the following: virgin money super, ING living super, Eiss super, Energy super, etc. which have different benefits. Each of the superannuation funds has risks associated with them. Interest rates might change positively or negatively affecting the value of the Superannuation (Robert, 2014). It is in the best interest of every individual to see an increment in the value of their superannuation because it implies that they will get more money when they retire. Market risks can create an atmosphere that might affect the funds either positively and negatively. Liquidity risk can affect the funds such that in the event of an investment being liquidated quickly it affects the value of a superannuation fund negatively.

            These risks should be critically looked into such that the super fund with the least risks is chosen. It is uneconomical to choose a plan that will not yield the expected outcome and might end up being insufficient after retirement. It is important for an individual to get the value for their hard earned money. The defined benefit fund and investment choice fund both have risks associated with them. It is also good to acknowledge that the risk might affect the superannuation funds positively rather than negatively increasing the value of the fund. Studying the market trends should also help in choosing the right plan.

Insurance Cover Provided by the Superannuation Plans

            It is essential to consider the kind of insurance options offered by the plan. It is estimated that a majority of Australian workers are underinsured. Insurance is a vital factor to consider because a failure to get one might make one spend a lot of money after retiring. The various kinds of insurance offered by the plans are life insurance which ensures that an individual’s beneficiaries receive a large amount of money in case the person dies. In situations where the individual has dependants, they can use the money to fend for themselves. Disability insurance sees to it that an individual is paid a large sum of money in case they develop a disability. Income protection insurance ensures that an individual is paid in case of falling ill or having an injury. These insurances are important in an individual’s life because some calamities cannot be controlled. Looking for a plan which has more insurance offers at an affordable premium is beneficial to an individual. Most lower-cost accounts do not include insurances such that if an individual falls sick or sustains injuries and is unable to work will spend a lot of money without an income and compensation. This will make life hard.

Performance

            Performance of the superannuation is a vital factor that should be considered before choosing the type of plan. The plan is a long term investment. Therefore, it should be treated with a high level of seriousness. A minimal difference in the performance of superannuation plans might lead to a large impact on an individual’s savings after retirement. It is advisable to check the performance of the superannuation for five years and evaluate its performance. If a plan has had negative performances frequently, it will be wise to avoid the plan no matter how cost effective it is. The tax rates on the funds should also be considered when looking for an appropriate plan. High tax rates will mean the value of the superannuation will decrease. The performance is crucial as it will determine the value of an individual’s money after retirement.

Investment Choices

            There are some investment options that come with each plan. Someone gets to choose where to invest their funds according to the risks assessed. The higher the risk, the higher the superannuation might increase in value if the risk doesn’t occur. Superannuation is within the tax structure of the Australian Taxation office. The investments can range from Australian shares, cash and bonds. Some investments can be affected negatively by risks lowering the value of the superannuation. Market risks can affect the Australian shares investment both positively and negatively depending on the current situation.

             An increase in the value of shares will lead to an increase in the value of the funds while a decrease in the market shares value will lead to the decline in the value of the funds. In case it is difficult for someone to know the right investment to venture in, it is recommended that the individual consults a specialist to be advised appropriately. People from different age groups are not expected to make the same investments. For instance, it is advisable for someone who only has one decade before retiring to invest in Australian shares.   Hence, this is an important factor as it will give an individual the freedom to modify the superannuation investments to fits their needs and preferences. The needs for retirement vary; some want an average amount of money while some want a significant amount of money. This can be attributed to the fact that some may wish to start businesses upon retirement, hence the need for start-up capital. Since the kind of investment made will influence the amount of money someone receives, it is crucial for the plan to include multiple investment options so that someone has may option to choose from. The least number of choices expected in a superannuation plan should be five to match an individual’s asset allocation needs  (Horneff & Raimond, 2008). The goal of an individual is to have the freedom of an array of investment choices to choose from which will coincide with their needs.

Services offered by the superannuation

            There are some services that can be offered by a superannuation plan that is beneficial to the individual. Services like having the ability to transfer the funds from another account to your account in case someone decides to change the superannuation plan. It is convenient as the previous savings would not be lost. The option of making an additional contribution other than the amount deducted from income in an individual’s account. Incomes from employees in tertiary sector differ with seasons. There are seasons that they earn more money than other seasons. A fund plan should enable an individual to make more contributions at their own will due to the difference in incomes during various seasons. The fund should have the option for financial planning advice; which will be easier for individuals who find a hard time in getting the most appropriate plan. The fund should also have a superannuation calculator to enable an individual to calculate the value of the savings throughout their lifetime.

Investment Flexibility

An investment should offer an individual the flexibility desired even though it might come at a cost. The low- cost funds do not offer such; it means that the funds are being underutilized. Some individuals wish to own homes when they retire or even commercial real estates and other businesses. The plans should include options such as self-managed superannuation fund. The plan should also allow for funds to be rolled over to another account which has better investments as desired by the individual. This will give the individual the will to change the account they have a change in their priorities or if they have a salary increment and wish to invest more.

Conclusion

            The superannuation plan is vital for the employees of the tertiary sector as it gives them a source of income when they retire. Essential factors should be considered before choosing a superannuation plan so that an individual can benefit from it when they retire. The right investment choices should be made as per the individual’s needs; the right investments will also enable one to earn more money after retirement.

References

7 Factors to Consider in Choosing a New Super Fund. (2015, December 30). Retrieved May 18, 2018, from Srg Finance: https://www.srgfinance.com.au/blog/7-factors-to-consider-in-choosing-a-new-super-fund/

Choosing the right super fund. (2017, January 1). Retrieved May 18, 2018, from https://www.bridges.com.au/pdf_flyers/ed_flyers/superannuation/choosing_the_right_super_fund

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Christine, T. (2015, January 22). Defined Benefits Funds vs. Accumulation Funds. Retrieved May 18, 2018, from Canstar: https://www.canstar.com.au/superannuation/accumulation-defined-benefits-whats-the-difference/

David, T. (2014). Factors behind the administrative fees of private pension systems an international analysis. Journal of Pension Economics & Finance, 88-111.

Horneff, J. W., & Raimond, H. O. (2008). FOllowing the rules: Intergrating asset allocation and annuitization in retirement portfolios. Insurance: Mathematics and Economics, 396-408.

Research, C. (2017, December 13). How to Choose A super Fund. Retrieved May 18, 2018, from canstar: https://www.canstar.com.au/superannuation/how-to-choose-a-super-fund/

Robert, C. M. (2014). The crisis in retirement planning. Harvard Business Review, 43-50.

Rosalie, M., Colin, C., & Ian, M. (2002, March 13). Australia’s Service Sector: A Study in diversity. Retrieved May 18, 2018, from Australian Government Productivity Commission: www.pc.gov.au/research/supporting/service-sector

Tertiary indusry. (n.d.). Retrieved May 2018, 2018, from Investopedia: https://www.investopedia.com/terms/t/tertiaryindustry.asp