In all facets of our daily lives, we know how much we are paying for the things we consume.
Everything has a fixed price and we decide if we are willing to pay that price. Not so with Superannuation.
To have someone manage your Super you never quite know what you are paying because the fee is based on a percentage scale of your investment balance which is constantly changing.
What is wrong with Percentage Fees in Superannuation?
The biggest issue with percentage fees is that the fees grow with our superannuation balance.
Take this scenario: Your employer must contribute 9.5% of your salary into your superfund each year by law.
If you have $200,000 invested in superannuation, your super balance will grow in value by approximately $20,000 per annum, assuming an 8% pa rate of return, i.e. a 10% growth in your Super Balance per annum.
That 10% pa growth in your investment balance results in a corresponding 10% pa growth in your annual Super fees. The fee increase is automatically charged each and every year.
At first glance, a fee of 1% or 2% seems fairly reasonable.
However, if a Retail Fund charges a fee of 2% pa. on a $200,000 Super Balance, this equates to an annual fee of $4,000 per annum that is growing at 10% every single year.
The rort escalates.
So whether you are in a higher fee paying Retail Fund or a supposedly Low Fee Index Fund, your Superannuation fees are forever increasing - money that is better off increasing to your Superannuation nest egg.
The only reason this rort has been allowed to go on for so long, is because the fee is usually automatically deducted from your earnings and the net amount is credited to your account.
So there is no actual "payment" and therefore you don't notice what you are actually paying.
Consider this. If the same Retail Superfund (assuming a Super Balance of $200,000) sent you an invoice every single month for $330 and increased it by 10% per annum every single year (without ever notifying you or justifying why), would you pay it? Probably not.
At the very least you would certainly start asking questions especially once you realised that your Superfund had simply invested in the top 50 or 100 stocks on an Index.
What is the alternative?
The obvious alternative is a fixed fee structure. A fixed fee structure provides you more certainty where you know up-front exactly what your costs will be.
The only option that offers this alternative is a Self Managed Super Fund (SMSF). ESUPERFUND offers greater fee certainty for SMSF's, with a free setup fee and a fixed annual fee of .
For more information about ESUPERFUND's Fixed Fee Structure, please visit here.
Before you start
An SMSF can be a great vehicle to take back control of your Super but an SMSF may not be right for everyone.
We have conveniently summarised other factors to consider when contemplating setting up an SMSF here.
We also assist you in understanding what is involved in the ongoing management of your SMSF via our Free SMSF Learning Centre here.
If you want to learn more about SMSFs, download an today.