- Super funds are a great way to save for retirement and secure a lump-sum or time-based fund withdrawal in the future.
- The advantages of super include reduced working hours, tax benefits, and the possibility of starting an account-based pension.
- There are certain risks in a super, like investment risks, operational risks, and sequencing risks, which must be considered before investing in it.
Super funds are a long-term investment instrument, which act as a security post retirement. Individuals invest in a super fund to receive increased returns on top of the invested amount when the super account matures.
Employers must put 9.5% of an employee’s salary into super fund through the Superannuation Guarantee. Additional contributions can be made to super by the employee himself. Seemingly, super funds sound like a secure and risk-less method for individuals to plan out their retirement. However, the risk aspect is introduced when these funds are invested to help the balance grow. Once locked in, super funds cannot be withdrawn by the account holder before retirement as they are used for reinvestment by the super agency.
Individuals must make an informed decision about super funds based on several aspects underlying them.
The Beneficial Aspects
Super funds have many beneficial aspects associated with them, which give them an edge over other retirement funds. These benefits include:
Reduced working hours
Super funds allow individuals to supplement regular pension income with income from these funds. Super funds can be withdrawn in a lump-sum manner or in the form of steady income every month. Individuals in their late 60s who wish for early retirement can rely on their super funds.
Tax rebate is offered on the funds that are deducted from an employee’s salary and added to super funds. Even if an individual wishes to work full-time without an early retirement, super funds allow tax incentives. The salary which would otherwise be taxed can be made tax-effective by opening a super account and putting some part of the salary in it. Though the tax savings would only be made available to the account holder after retirement, the cumulated savings would increase investor’s profit.
Reinvestment in an Account-Based Pension
Once super funds are realised, they can be used to start an account-based pension. With the option of lump-sum withdrawal of super funds, account holders can invest the entire sum of money into a retirement-phase income stream. This stream provides regular income with minimum pension payments each year.
The Risky Aspects
Super funds received at maturity depend on how the investments have been made and how much of an employee’s and an employer’s contributions have gone into the funds. Super agents provide investments in equity, exchange-traded funds or term deposits. Certain agents may also offer packages based on the risk appetite of an account holder. Some of the risks that investors should be wary of include:
As is the case with any investment instrument, certain risks are attached to investing a sum of money, which are hard to predict in advance. These include risk pertaining to the market in which investment has been made, risk of currency fluctuation for international investments, inflation risk, interest rate risk, counterparty default risk, etc. There is always a certain degree of risk associated with investments, which is hard to mitigate completely. However, being aware and staying cautious are the best ways to avoid getting into a bad investment.
This type of risk is present in all organisations and organisation-run funds and accounts. The third-party administrators may not meet their contractual obligations, landing the account holder in a huge loss. Additionally, there is a possibility that the system of the process followed by an agent does not give out correct results.
Sequencing risk is the risk attached to the order of annual returns negatively impacting the total value of portfolio upon withdrawals. Larger withdrawals mean there is greater sequencing risk.
Apart from these changes, super law may change depending on the economic scenario. There is also the risk of no insurance cover in certain circumstances, as stated in certain insurance policies in the fund.