Aussie Superannuation and why Centrelink is a PITA

[Abundant life]

Well I suppose the problem is that we have RE without being FI, not discovering the MMM philosophy until after retirement. However it is not all bad as we've always been frugal, paid down debt asap and have some savings. I would like to optimise our position going forward.

My husband has received a Centrelink disability Pension for most of his life, and I, as his wife/carer also receive a pension.

When he retired at 59 his industry super fund recommended he not draw his meagre super pension until retirement age 65.5, giving it a few extra years to grow. (Super became compulsory well into his 30s and he only ever worked part time).

About two years ago we were informed that he had to draw his super pension or else it would be counted towards the assets test, so it provides $298 per fortnight.

We are in the process of downsizing and when finished we will find ourselves with half the value of our original house in cash. Centrelink recommend putting it into super until we reach retirement age. Why, I asked, when within the last two years you made us take a super pension? Apparently the rules have changed, again.

So I've been looking at different super options:

Juggernaut industry fund - who have a conservative balanced fund option which includes portions of international and local shares, bonds etc plus infrastructure which 'smooths out fluctuations' in the share market. Apparently the infrastructure component is not available to private investors. Although they advertise a small fee, there are management fees taken out of the increases before we see them. (As an aside, they were skiting that their pension fund was only $2000 per year while others charge twice that. That was the same as we paid for private health insurance that year!).

An online no frills super fund - with options to pick your own shares/LICs/ETF including a few Vanguard options. There are limits to the proportion of your balance you can put in these.

I have no idea how to compare fees of one with the other, or anything else I should consider. I would appreciate any wisdom offered.

[Rob_S]

Hi Abundant life,

MMM poster Superannuation Freak's blog is a good resource on all things super : http://superannuationfreak.blogspot.com.au/

From what I remember he recommended SunSuper if you're an indexing fan.

If you go with a fund where you ocik our investments, oftne called direct investments, then I recommend reading this post that I found really helpful in getting a strategy in place for my own super: http://www.superguide.com.au/comparing-super-funds/guest-contributor-how-1-million-can-last-longer-than-you

If you go with the no frills online option LIC's seem a reliable fully franked dividend payer and thus a popular investment choice.

Are you saying your husband's super fund charges $2,000 per year? Is it an allocated pension? I'd be concerned if that's more than say 2% of the balance.

[MustacheAndaHalf]

Can't speak to Australian law or investing, but wanted to highlight one problem:
"I have no idea how to compare fees of one with the other ..."

That's probably want people taking your money want.  But until you know how much they're taking, and the rules for getting it back, keep searching.  I personally favor index fund investing, where you invest in something like "Vanguard World" ETF ("VT") that covers every country's stock market proportionally.  ETFs tend to be available internationally, and Vanguard has many funds that take $1 / year for every $1000 invested (a 0.10% expense ratio).  So you may think "2% per year" in expenses is small, but it's actually quite large by mutual fund and ETF standards.

[cakie]

Often with centrelink, it is worth spending the time finding out their equations and cut off points for things yourself - advice from them is a good starting point , but they won't always tell you the right thing for your specific circumstances. Run a few scenarios in excel to make sure. That goes for super too - be careful with their listed fees! I switched to my new employer's AMP fund last year, and nowhere in the docs did they tell me they would take out monthly 'advisor' fees!! Was not impressed- they are still cheaper but it is dodgy behaviour to leave it out of the PDS...

[Abundant life]

Hi Rob_S thanks for those links. I had read superannuationfreak's blog before, but I re-read it as it was worth refreshing my memory. It was such a shame that he stopped because of his perceived bias. I have seen him post on the Aussie Investment thread, so he must still be around.

The link to superguide is also a valuable blog for Aussies. I tried reading them to my husband but he tuned out by the second paragraph. What the original poster was proposing seemed a simple straightforward strategy, especially conserving your capital for as long as possible by living off dividends and franking credits, but it seems that would go against prevailing thought about diversification. Also I don't know if a SMSF would be good for us in the future as, if I cark it first husband would have no idea.

MustacheAndaHalf, so true in regard to fees and charges. Interestingly I went to a Juggernaut Superfund's meeting this morning for their pension fund recipients. Gees. They went over the usual blurb about why the rules are changing: life expectancies rising over the last 100 years, the ratio of workers to Centrelink pension recipients. How they outperformed their benchmarks, how big they are with $100 billion under management blah blah blah. Their charts showing their performance looked good since they only reflected the last five years!

Interestingly I got to talk to their financial advisor at the end of the meeting. He had been in the business for 20 years. I told him how we had been advised by Centrelink's financial information service to take the super pension approximately two years ago, otherwise the super balance would be counted as an asset, and he looked at me blankly :( 
I had to double check with my husband that I really had heard that advice correctly! Sheesh, so we didn't really have to take a pension after all.

Then they showed us a bar chart demonstrating how low their fees were:
For a balance of $50,000 - Juggernaut Industry fund $498, others $724
For a balance of $100,000 - Juggernaut Industry fund $918, others $1320

So a balance of $200,000 would be attracting fees of approximately $1800 according to today's figures. The financial advisor insisted it would only be $1300? So I think I'll phone them for further information.

Cakie, it seems getting accurate advice is a bit of a mine field, and it's all care and no responsibility from both Centrelink and financial advisors. If Centrelink make a mistake in my favour I have to pay it all back, fair enough. If they make a mistake in their favour, they only have to backpay me 3 months worth or from when I challenged it. I trusted them to tell me the truth and give accurate advice. So I asked them, does that mean I must challenge every bit of your advice to cover myself in case of a mistake made by your staff? Apparently so.

I did learn today that earnings are not taxed (yet) in a super pension so the return is better, whereas in the accumulation phase earnings attract 15% tax.

[deborah]

Since Jan 2015, NEW superannuation pensions are treated differently wrt the aged pension - I suspect that Centrelink was right, and the person you were talking to didn't know their stuff - see http://www.superguide.com.au/smsfs/new-income-test-rules-mean-less-age-pension

You might also want to read http://www.superguide.com.au/boost-your-superannuation/a-case-study-i%E2%80%99m-53-is-it-too-late-to-save-for-my-retirement

[hodor]

AustralianSuper, CBUS and ING living super all offer funds where you can invest in shares directly.

AustralianSuper and ING allow up to 80% to be invested into shares directly, you can invest in ASX200 companies, some LICs and ETFs (the one's recommended widely here are available). The remaining 20% you can invest into their other plans including shares. ING has a $300pa management fee regardless of balance for the share option and they have a no fee option that is split 50/50 with cash and shares for your remaining 20% balance, meaning you effectively have up to 90% exposure to shares if you want. So you can certainly get your fees lower than those you quoted.

You should seek professional advice regarding putting the proceeds from the sale of your property into super. From my understanding it could be an excellent option to minimise (or even eliminate) paying tax. Minimising tax will have a big effect of your income from super, especially if you focus on investing in Australian companies offering fully or largely franked dividends. the ETF VAS offers around 5% yield with 70%+ franking - so around 6-6.5% grossed up yield without selling down capital. If you wanted to put all your eggs in one basket you could get around 10% grossed up yield in a bank atm, wouldn't need a huge balance to live the good life off that (non of the super funds actually offer this they have maximum 20% balance in any one security).

Obviously you need to do your own research an decide on your risk profile. I don't see price volatility as risk given historically dividends have remained stable.

imo it is good policy that if you are retired you are forced to draw some from your super, it isn't there to be stashed away forever it is there to give people a better retirement and lessen the burden of the aged pension on the budget. Don't get me wrong I am very proud Australia offers pensions etc to ensure a certain quality of life for all, just people should be equally grateful.

[superannuationfreak]

Unfortunately, as you say, there could be a (at least perceived) conflict if I suggest any superannuation products.  I would, however, like to suggest a gradual process rather than trying to think through everything all at once.  First take a deep breath!

Then put aside products and consider your ability, willingness and need to take risk.  Here is a series of very short articles by Larry Swedroe that may be helpful (the numbers are a bit US-focused but the principles apply anywhere):
http://www.cbsnews.com/news/asset-allocation-guide-how-much-risk-should-you-take/
http://www.cbsnews.com/news/asset-allocation-guide-what-is-your-risk-tolerance/
http://www.cbsnews.com/news/asset-allocation-guide-how-much-risk-do-you-need/
http://www.cbsnews.com/news/asset-allocation-guide-dealing-with-conflicting-goals/

There are retirees who are comfortable with substantial short-term volatility.  My parents aren't comfortable with more than about 1/3rd of their financial assets in risky assets, would probably like even less if they thought they could manage it but it's quite likely one or both of them will need to live on those assets for a fair while.

If you can learn enough to figure out where you sit on the risk spectrum that can provide some starting insight into what asset allocation might best suit you.

Then you can look for a fund broadly consistent with that level of risk (or specific asset allocation).  There's no need to make it complex with picking specific sub-funds (like Australian Shares) or ETFs.  You can usually get close in risk level using a single investment option, or maybe two. Keep in mind that the fees I mention in my blog are usually for the accumulation option, the pension option may be different.

To reiterate, all this may seem overwhelming.  Just take one step at a time.

[happy]

I would look at some other industry funds as well. Juggernaut doesn't sound cheap to me. For an investment of 50k my super fund would charge between $152 pa for cash, up to $477 for a "diversified socially responsible" option. Many of the investment options work out at $350 - $380 pa.  As well as evaluating cost, you should look at returns…not much point in having a cheap superfund if it performs really poorly also. Costs for an income stream(pension phase) are just slightly higher - another $152k pa.

Super funds should have a section in their literature showing fees and costs. Search under fees and/or look at details of investment options which should show costs associated with each option. It is a bit of a swot scrolling through all the details. Most funds seem to have 2 or 3 different charges that you have to add together to find out their total costs e.g. my fund has a flat fee of $52pa plus a management fee of 0.15% of the account balance, PLUS an indirect fee which is different for each investment option but does not show up on the statement separately- its already accounted for when you purchase. So you don't see it on your statement but you can work it out. ( this had me fooled for a while when I was trying to work out costs to compare with the cost of a SMSF)

I suspect all super funds will have a slightly different way of presenting this information. Even though things are supposed to be more transparent since super is compulsory, its still not totally easy and funds  have a vested interest in making it hard to compare like with like.

But its your money, so IMO its worth the effort.

[Abundant life]

Thank you everyone for your replies, I've been unable to respond sooner as we have been on the road.

Since Jan 2015, NEW superannuation pensions are treated differently wrt the aged pension - I suspect that Centrelink was right, and the person you were talking to didn't know their stuff - see http://www.superguide.com.au/smsfs/new-income-test-rules-mean-less-age-pension

You might also want to read http://www.superguide.com.au/boost-your-superannuation/a-case-study-i%E2%80%99m-53-is-it-too-late-to-save-for-my-retirement

deborah, thank you for those links. It was like a burden was immediately lifted off our shoulders when we realised where the error probably occurred. I've only read a couple of the articles on the superguide site, but it seems really helpful.

AustralianSuper, CBUS and ING living super all offer funds where you can invest in shares directly.

AustralianSuper and ING allow up to 80% to be invested into shares directly, you can invest in ASX200 companies, some LICs and ETFs (the one's recommended widely here are available). The remaining 20% you can invest into their other plans including shares. ING has a $300pa management fee regardless of balance for the share option and they have a no fee option that is split 50/50 with cash and shares for your remaining 20% balance, meaning you effectively have up to 90% exposure to shares if you want. So you can certainly get your fees lower than those you quoted.

You should seek professional advice regarding putting the proceeds from the sale of your property into super. From my understanding it could be an excellent option to minimise (or even eliminate) paying tax. Minimising tax will have a big effect of your income from super, especially if you focus on investing in Australian companies offering fully or largely franked dividends. the ETF VAS offers around 5% yield with 70%+ franking - so around 6-6.5% grossed up yield without selling down capital. If you wanted to put all your eggs in one basket you could get around 10% grossed up yield in a bank atm, wouldn't need a huge balance to live the good life off that (non of the super funds actually offer this they have maximum 20% balance in any one security).

Obviously you need to do your own research an decide on your risk profile. I don't see price volatility as risk given historically dividends have remained stable.

imo it is good policy that if you are retired you are forced to draw some from your super, it isn't there to be stashed away forever it is there to give people a better retirement and lessen the burden of the aged pension on the budget. Don't get me wrong I am very proud Australia offers pensions etc to ensure a certain quality of life for all, just people should be equally grateful.

hodor, thank you for your input. I'm afraid one of the funds you quoted was the one who quoted me those fees!

Re tax, we have never been in a high tax bracket and are nowhere near the tax threshold of $18,000 each. I understand that earnings within the accumulation phase of super do attract 15% tax, whereas (so far) earnings in the super pension are tax free. If our 'leftovers' remain outside of super, the earnings will attract tax, plus reduce my Centrelink pension substantially. That is why the Centrelink financial information service 'suggested' putting it into super. That said, all bets are off when we actually go on the aged pension in about 3.5 years, as opposed to the disability/wife's pension.

You have also confirmed that super funds will not allow you to put more than 20% in any one share holding. It's a safe guard if the share holding only reflects one company, but in the case of ETFs and LICs? - maybe it's just a way of diversifying these too?

I am not against drawing a super pension to supplement the aged pension, just concerned that it will last long enough when we have such a low balance to start with plus drawing it sooner than anticipated. I'm sorry if I come across as ungrateful for the Centrelink benefits, I truly appreciate all that has been provided. I do try to give back to the community in ways that I can, I'm just frustrated and perhaps a bit panicked at the constantly changing goal posts and my ability to 'keep up' as I age. My parents are still alive, but all this is now beyond them.

superannuationfreak and happy, I need to go to bed. I will respond to your posts when I can get online again.

[hodor]

Not sure which one of those funds quoted those fees.

ING is the one I found to work out the cheapest with $300pa fee for the "shares catergory" and zero fees for the 20% balance of funds in the "Smart category" (50% shares and 50% cash) - I haven't actually switched yet, on my to do list. Not sure on fees while you are drawing a pension and this might be the thorn in your side.

The $298 a fortnight  should be manageable while still growing your portfolio. I have no idea of your balance, however, as little as $150k in the ETFs below should give over $300pw in dividends once taking into account franking credits and 15% tax rate in super. A bigger balance just means you can increase your asset base moving towards retirement. Dividends dropped comparatively little even during the GFC and if you went the LIC path they were even more stable, even though past performance isn't a reliable indicator of future performance it is secure enough for my tastes.

You can work around the 20% rule in any one stock by using VAS, STW, IOZ or similar system depending on your desired breakdown. Obviously this will expose you to significant price volatility, if you are just counting on the dividends I don't see this as risky, volatility and risk can be two different things imo. I am young and therefore my views are from a different perspective.

[Abundant life]

Well it's been a long two months, so here's my first update:

Superannuationfreak I read all those links about attitude to risk. Also during this time Scott Pape had an interesting article on appetite for risk for retirees:

If you think you’re close to ‘kicking the bucket’ (well, 55 and over), you need to read this. And if you have someone in your life who’s in the bucket-kicking zone, you should share this column with them -- because it will save them a lot of heartache, stress and money.

I’m going to explain how the average retiree in this country gets screwed over by their super fund when they retire. And I’ll show you the simplest way to safeguard your savings when you retire.

Let’s begin.
 
One of the bravest things I’ve done in my adult life was to take my bride to the pub in the weeks leading up to our wedding day. Once seated, I scribbled our lifetime financial plan on the back of a serviette.
 
It consisted of me drawing three buckets:
 
Blow Bucket: all our living expenses, including house repayments (this bucket has a hole in it).
 
Mojo Bucket: three months of living expenses (this bucket gives you a feeling of safety and security).

Grow Bucket: superannuation, investment properties and shares (this bucket makes you wealthy).

And then I drew a tap above the buckets, which represented our income that we could pour into the three buckets.
 
The reason my three-bucket strategy is so powerful is that it’s so simple. It keeps you on the same page financially throughout your marriage. However, after talking to hundreds of Barefooters (and my parents), I’ve discovered that it can fall apart when you retire -- when you turn off the tap.

Kicking the Bucket
 
The big mistake most people make is putting all their money into the one bucket when they retire -- super. In most cases, your super fund will automatically invest your life savings into what they call their ‘balanced option’.
 
Question: What does ‘balanced’ mean?
 
A good guess might be that riskier assets like shares would be balanced out by safer assets like cash and fixed interest.
 
Wrong.
 
The average Aussie super fund has more money invested in shares than in almost any other country in the world, according to a study by financial outfit Mercer. It varies from fund to fund, but right now your balanced fund could have as much as 70 percent of your money invested in shares.
 
Of course, over the long term, shares outperform every other asset class, so having a default fund chock-full of stocks is a very good thing if you’re a young Playboy Bunny … but not so good if you’re old Hugh Hefner.
 
As the big Texan, Dr Phil, would say, “how’s that work’n for ya?”
 
Great … at the moment.
 
“The average super fund has delivered 9.5 per cent over the last seven years”, a press release from SuperRatings says.
 
Hang on, why are they only talking about seven years of returns?
 
BECAUSE THEY DON’T WANT TO TALK ABOUT WHAT HAPPENED IN THE GFC.
 
So let’s talk about the GFC, and the heart palpitations and wealth destruction it caused retirees who had all their savings tied up in the one very unbalanced bucket.
 
Here’s another question for you:
 
Guess which country suffered the biggest losses on retirement savings during the GFC?
 
Iceland.
 
Guess who was the second biggest loser?
 
Australia.
 
Yes, the Organisation for Economic Co-operation and Development (OECD) found that our superannuation funds lost a larger share of their members’ funds than any other pension system in the world -- with the exception of Iceland.
 
But let’s not be too cocky. There’s no glory in beating Iceland for the wooden spoon. Seriously, even being put in the same sentence as Iceland is embarrassing: relative to its population, this fishing village masquerading as a country suffered the single largest banking collapse in history, which left it in a severe economic depression.
 
So the $64 billion question is, how can Aussie retirees like you avoid this happening when (not ‘if’) the next GFC happens?
 
Answer: Go back to the buckets
 
 
The Three-Bucket Retirement Solution
 
Take your partner to your local (and take advantage of $5 pensioner parma night).
 
Grab a serviette and draw the three buckets, and explain that this is how you’re going to safeguard your savings as a couple throughout our retirement. Like Goldilocks, it’ll ensure you don’t take on too much or too little risk, but get it just right.
 
The ‘Blow’ bucket is still where you draw your day-to-day expenses, and that should be in cash.
 
Your ‘Mojo’ bucket is where you get your safety and security. Throughout your working life, it should sit at three months of living expenses. When you retire, you should boost your Mojo bucket to three to five years of living expenses (factoring in any age pension you receive).
 
If you’re a Collingwood supporter, you’re probably quite comfortable with losing, so you may only need three years of living expenses. If you’re a nervous type, shoot for five years of living expenses.

Here’s the thing: knowing that you have three to five years of money socked away is going to save you from a lot of sleepless nights when the markets get rocky. The last thing you want to do is watch your investments crash, panic, and sell them all at the bottom of the market -- just because you’ve got no cash to live on. It’ll buy you time to ride out the storm, when your shares will rebound.
 
And remember, be conservative with your Mojo -- a nice balance of cash and fixed interest (even though interest rates are low). With Mojo, we’re chasing a different type of return: peace of mind.
 
Your ‘Grow’ bucket is where the remainder of your money should be invested. Specifically, it should be invested it in good-quality, dividend-paying shares (or share funds) within your super. And, most importantly, you want to direct the dividends from your Grow bucket to automatically flow into your Mojo bucket -- so you’re always automatically replenishing your Mojo.
 
In retirement, with your income tap turned off, your biggest risk is that you’ll outlive your savings. You need to stay ahead of the rising cost of living, and historically the safest way to do that is by investing long term in the share market (Grow) while still protecting yourself (Mojo).
 
Right now, the GFC is a distant memory.
 
Right now, the US market is on the second longest upswing in stock market history.
 
That’s why the time to set up your retirement buckets is right now.

Also I should mention that previously I've read and been impressed by Jim Collins' stock series, for its honesty and simplicity (he is also a fan of index funds) plus he's more at our stage of life.

So I had the big discussion with husband, and was surprised by what he was prepared to stomach re appetite for risk. (We had previously been bitten during the GFC: saw everything going backwards for an extended period of time, so switched our allocation and locked in losses).

I was thinking maybe he would go for 50/50 or less. Turns out he didn't like the idea of such a big proportion of our nest egg eaten up by inflation. He is happy to be invested in shares up to 75% as long as we have a decent amount available as a buffer equal to three years worth of expenditure.