Aussie migrants-Superannuation 101
Okay, you've arrived and are slowly settling in. I'm going to kick off on the basis that you've found a home/rental, work and schooling if necessary. What key financial steps need to be taken care of?
It is a good idea to think about your financial goals and objectives before you start anything. Short, medium and long-term goals. This may be saving a deposit on a car or home, setting aside money for university fees, an overseas holiday or your eventual retirement. Once you know where you want to go, you can then start to work through this list as you get settled. If you haven't given thought to this before, it is crucial that you start now. As I mentioned in my last post (link) Australia is expensive and you don't want to make silly mistakes that can be avoided with good advice.
One of the first financial choices you need to make will be Superannuation or Super.
What is Super? Super is Australia's retirement vehicle. All employers are compelled to contribute 9.5% of your earnings towards the Super of your choice. (Your salary is normally quoted as $x, plus Super)
Your employer may have a default Super with a default fund. If not you will need to choose and join a Super individually and provide your employer with the details. What Super should you choose? There are four broad choices - an Industry Super, Public Sector Super, Corporate Super or a Retail Super. If for instance, you work in the hospitality industry, the default may be Hostplus Super. If you work for the NSW State, First State Super may you be the default.
A Retail Super is likely to be a Super linked to either a bank, insurance or investment company. There are also Super's that have no ties to either of the above that have built investment platforms and are attracting significant flows.
The last Super I didn't mention is a Self-Managed Super Fund or SMSF. An SMSF is a private superannuation fund that you manage yourself and can have up to four members. All members must be trustees (or directors, if there is a corporate trustee) and are responsible for decisions made about the fund and compliance with relevant laws. Set up costs and annual running expenses can be high, so it's most cost-effective if you have a large balance.
Can you change your Super? Yes. And even if you work in the hospitality industry, you don't have to join their industry Super. You can select any Super you wish, and change or "roll over" from one Super to another Super without too much admin. It is best to have a single Super rather than multiple Supers for a number of reasons. First, most Super's will aggregate their fees and thus the larger your Super balance the lower the annual administration fees. Second, you will have less admin in monitoring how each Super is performing relative to your goals. Lastly, often there is a requirement to hold a certain percentage of the Super balance in cash. If you have a range of Super's your cash balance will be higher than you may want it to be.
Does Super include insurance? Most Super's have an option to select an element of insurance. Many will include a default amount of cover, however, the default cover is unlikely to be sufficient to adequately provide for you and or your family. Super funds will typically have the following insurance cover available:
- Death/Life cover - you can nominate a beneficiary (non-binding or binding) with the capital paid as a lump sum or income stream.
- Total and permanent disability cover (TPD) - pays you a benefit if you are unlikely to work again. The caveat here is that you can only be insured for "any" occupation, not "own" occupation and thus there is less likelihood of a claim under this definition.
- Income Protection cover (IP) - pays you an income stream for a specified period, after a specified waiting period, if you can't work due to temporary illness or injury.
Critical illness cover, or Trauma cover, which you may know as "dread disease" cannot be held through Super.
If you cover is through your Super, the insurance premiums are deducted from the Super balance. This can alleviate cashflow constraints however it will reduce your capital for retirement.
Some providers or types of Super allow you to secure life, TPD and IP cover in your personal capacity, with this cover being "held" in your Super. This allows you to look at a range of insurance companies to ensure you secure cover that is cost effective. It may also provide you with additional benefits, Vitality for example, that make it a compelling option to secure this cover as opposed to the default Super cover.
What investment options do you have? Most Super platforms allow you to invest in a wide range of unit trusts/mutual funds, ETF's and shares. One of your biggest issues will to the temptation of watching the top performing investment alternatives from quarter to quarter and feeling the need to make a change as opposed to not having sufficient choice.
To wrap it all up, Super is likely to be the biggest portion of your wealth accumulation between now and retirement. It is important that you ensure that:
- you are invested in a cost-effective Super platform;
- the asset allocation of the investment is appropriate;
- your investment selection is in line with your goals and objectives;
- you nominate a beneficiary;
- you increase your contributions where possible;
- secure the appropriate insurance.
Lastly, you need to set aside time to review your Super and insurance. It's easy to be complacent about it because the contributions are deducted from your salary and you don't "feel" the pain of it being taken away and invested like after-tax money. Also, you will have so little free time you may just choose to ignore your Super. Don't.
If you choose to work with a reputable financial adviser, meeting for an hour or two every year to review your goals and objectives, as well as your overall financial position, is a small price to pay to take control of your financial future.