Superannuation: The Devil is in the Detail
Superannuation law has what is called a “sole purpose test”. That means that you have to keep the savings for superannuation funds for your retirement. However, how the retirement benefit is provided varies enormously from fund to fund.
We are often asked “what is this superannuation worth?” However that is like ordering a meal by reference to the price only – you may get your meal but you usually prefer to know in advance whether you are getting the fish, lamb or vegetarian. This is why most people when they go to a restaurant consider the menu before ordering. In superannuation, we call this considering the nature, form and characteristics of the interest.
Some superannuation funds provide ancillary benefits such as insurance or a reversion so that your children or your spouse are looked after in the event of your untimely demise. Other superannuation funds provide a type of income replacement in the event you lose the capacity to work. The retail or industry fund superannuation is different to the defined benefit superannuation interest (such as a public service or military fund). And the SMSF sector is the biggest sector in superannuation. Investments can be of the “vanilla investment” variety such as managed funds while other funds may invest in more “exotic investments” such as property trusts (we recently saw the equity in an accounting partnership as an investment).
Then there are fees. Some funds charge no fees, some funds charge a small fee, some funds charge large fees. Some will considerable savings and some will have little (especially women with broken work patterns). The variety of funds that are out there is enormous which is why it is important to get good advice about the fund when making important decisions about your retirement, estate planning or resolving family law or family provision disputes. Not all funds are the same so they should not be treated that way.
For example, an accumulation fund and a defined benefit fund may both be valued at $400,000 (the defined benefit fund would be actuarially valued). On the face of it, they have the same value however the nature of the superannuation interests, the form in which they are paid and the inherent characteristics may be quite different. The accumulation fund is subject to the ebb and flow of the market and the pension payment is set at a minimum amount each year. However the member could choose to take the whole amount as a lump sum at any time if they needed to.
The defined benefit fund on the other hand may be guaranteed for life and not subject to market forces. But the member can only be paid a non-commutable indexed pension, no lump sum. The defined benefit interest might be taxed (although concessionally) while the accumulation fund will now be tax free. If you have an SMSF it becomes even more complicated as particular care needs to be taken to consider the types of investments the fund has as well as the strict compliance regime for trustees.
Difficulties often arise when it comes to death benefits. The public sector defined benefit funds have fixed rules and the spouse of a long marriage may find there is no death benefit in the event of a late in life separation. And the accumulation funds rely on the nomination of the member which, if not properly made, can result in the death benefit being a contest with the trustee.
Know your superannuation.