Managed superannuation funds
Self-managed superannuation funds
Investment profiles and superannuation funds
Chapter 3- Making money in super:
Having received either concessional or non-concessional contributions, the super fund then combines the contributions held on behalf of all other members of the fund and invests them. These contributions are invested by the super fund for the benefit of the members. The investment returns derived from these contributions are then added to the account of each member and are available as benefits for the member when they become eligible to withdraw their money.
All super funds are managed by one or more ‘trustees.’ As the name suggests, these people manage the money within the super fund ‘on trust’ for the benefit of the members. In a managed superannuation fund, these trustees act much like a Board of Directors for a company (although there are some important technical differences). In a self managed superannuation fund, the members of the fund are also it’s trustees, meaning that the members look after their own retirement money.
MANAGED SUPERANNUATION FUNDS
The majority of superannuation benefits are held within what are known as ‘managed superannuation funds.’ These are large funds in which individual members have an account. Benefits of each of the members are pooled and used to purchase various investment assets.
Frequently, members of the fund have discretion as to how their benefits may be invested. At a simple level, members are typically able to exercise discretion as to the risk to which their superannuation benefits are exposed in the pursuit of investment returns.
Put very simply, managed superannuation funds generally invest in one of two types of asset: cash and cash equivalents; and equities (generally shares, but also similar types of security). Cash and cash equivalents are considered to be lower risk investments, while share-based investments tend to be higher risk. In order to justify this higher-risk, equities typically offer the opportunity for greater investment returns than can be achieved with cash or cash equivalent investments.
So, when a member of a fund exercises discretion for a particular investment profile (for example, high growth), the superannuation fund will direct that member’s benefits towards investments that meet that profile.
Managed superannuation funds tend to charge a fee for managing investments. This fee varies both between funds and within funds, depending on the type of investment being undertaken.
SELF-MANAGED SUPERANNUATION FUNDS
In a self-managed superannuation fund, the fund must have a written investment strategy that it applies to the management of member benefits. The Australian Tax Office have produced a simple, breezy video explaining the investment strategy required for an SMSF:
The trustees then apply this strategy and make investments on behalf of the members.
Typically, members of a self managed super fund share a very similar investment profile such that a single investment strategy can be applied across all of the fund’s members. For example, a married couple managing their own superannuation fund will typically have the same investment profile. They will need to make use of their money at the same stage of life as each other and this generally allows them to manage their separate superannuation benefits using a single strategy.
Next month we will publish a comprehensive e-book about self managed superannuation.
INVESTMENT PROFILE AND SUPERANNUATION
The term ‘investment profile’ refers to the level of risk to which investment assets are to be exposed. At one end of the spectrum is what is known as a conservative investment profile. If a conservative investment strategy is applied, investments such as cash and cash equivalents will typically be preferred over equities. At the other end of the spectrum is what is known as a high growth investment profile. Under a high growth investment strategy, investments such as equities are typically preferred.
Put very generally, the preferred investment profile is most influenced by how soon an investor is going to need the money under investment. If money is needed in the short-term, a conservative investment profile is typically applied. If money is not needed until the very long term, then a high growth strategy generally makes more sense.
It is worth remembering that superannuation assets are different to other forms of assets that the person may have. The main difference is that assets held within superannuation are preserved until the member reaches preservation age. In addition, assets held within superannuation are intended to finance a retirement, which may last 20 years or more.
As a result, people frequently underestimate how long-term the investment strategy for their superannuation benefits should be. Generally speaking, people can tend to convert their superannuation investments to a conservative profile too soon.
In many ways, it makes sense to establish a specific preferred investment profile for superannuation assets that may well differ from the investment profile that applies to non-superannuation assets. Consider, for example, a person aged 30 who is saving to purchase a family home. That person has $50,000 in personal savings and $20,000 in superannuation benefits. Because the $50,000 is intended to be used as a deposit for a home, it is likely to be needed in the short-term. Therefore a conservative investment approach makes sense for this $50,000.
Conversely, this person cannot access their superannuation for at least 25 years. Therefore, a conservative strategy makes no sense for the $20,000 held in superannuation. That money would more typically be invested in some form of high growth option.
In this way, the same person can have two or more investment profiles for different elements of their financial management.