Nick Bruining Q+A: Don’t get sucked in. Here’s the proper way to put a super fund’s performance to the test

Question

I recently received my annual super fund statement and am disappointed with the reported returns for the year.

I switched funds about 18 months ago after seeing my original fund perform poorly.

I don’t know what to do next and am considering another change.

What do you suggest?

Answer

While we all try to maximise the return on our investments, we can also fall victim to the many common mistakes all people make.

One of the biggest is to not compare apples to apples and to ignore the warning that “past performance is no indicator of future performance”.

The most significant factor affecting your fund’s performance is the mix of investments within the fund’s investment options — also called the “asset allocation”. (No, not the “brand”, the fees or the fact they are supposedly “not for profit”).

To make an accurate comparison, you firstly need to compare the like-for-like investment mix of your fund to alternative like-for like-funds.

For example, there is no legal requirement for a “balanced” fund to reflect a certain mix of investments. Indeed, one fund’s “balanced” option, might be another fund’s “high growth” option. You can check this by looking at the investment option’s specific asset allocations and then making the comparison.

When making that comparison, ensure you also line up the comparison period exactly. A three-month difference comparing one fund to another can make a massive difference in the apparent returns.

Next, look to the medium to longer-term returns to get a sense of the success of the super fund’s investment managers over time. Anyone can get lucky for a year or two.

In my view, that comparison period should be a minimum of three years and, hopefully, a bit longer. You can then compare that to similar super funds using free services such at the Federal Government’s “superannuation heat map” or, easier still, the comparison tool offered through the taxation linked service in your myGov account.

The latter has your specific super fund’s details and has an interactive service that can assist in comparing your fund to other funds.

Don’t just get sucked in by a funny/clever/deep and meaningful ad running on TV or online.

Some funds you think might be good, are in fact, very ordinary.

Question

I am 66 and about to retire as I turn 67 in January.

My husband is 69 and has been retired for some time. He receives a part Centrelink aged pension.

I have most of my superannuation in a transition-to-retirement account and that will revert to a conventional account-based pension on retirement.

A small amount of my super is still in an accumulation account. We would like to maximise the Centrelink pension for my husband when I retire.

Do you have any suggestions?

Answer

Your husband’s current pension is likely to be affected by your employment income, in addition to the deemed income from the ABP and any other financial assets you may have.

Given you are within 13 weeks of your own eligibility date, you can lodge your claim for an age pension now.

When you cease work, you should immediately notify Centrelink and the effects of your employment income on your husband’s pension will cease. Even if this is before your birthday, it will result in an immediate boost to your husband’s pension towards the current maximum rate possible, which is $862.60 a fortnight — or half the combined couple’s rate.

While your husband’s pension is likely to be impacted by the income test at present, the asset test may apply when you retire.

While you haven’t provided figures, as a home-owning couple you can have up to $470,000 in assets over and above the family home before you lose any pension.

Make sure that the asset values recorded by Centrelink are realistic. For example, your combined personal effects and contents can be realistically valued at their “scrap” value. Centrelink will often accept a figure of $10,000 in total.

Cars and other fixed assets should be recorded at their private sale values and not the insured values.

Each $1000 over the $470,000 will result in the loss of $3 a fortnight from your combined pensions.

Question

I retired in January at the age of 70 and I am living off an account-based pension that was started before January 2015.

A Centrelink assessment three years ago indicated I would not be eligible for a pension because my wife and I were about $90,000 over the asset test limit.

I still have remaining GoldState and WestState balances as well as bank savings earning a small amount of interest. My existing ABP will cease at the end of the year.

I want to apply for a Commonwealth Seniors Health Card. Can I withdraw my allocated pension money as a lump sum to lower my income level?

Answer

I think you should first consider applying for an aged pension.

You indicated you were previously ineligible because you exceeded the asset test. Since that time, the upper asset test thresholds have increased on at least nine occasions, and with your existing ABP about to run out you may already be under the upper thresholds.

For a home-owning couple, that limit is now $1,045,000, which excludes the value of your home. For a non-homeowner, the limit increases to $1,297,500.

When you last enquired in 2021, the limits for home-owning couples were $891,500 and non-homeowners $1,008,000.

Withdrawing the ABP will have no effect on reducing Centrelink-assessable assets unless you spend the money. That’s because you are simply shifting it from one assessable asset (the ABP) to another assessable asset (your bank account).

The other thing to consider is that when you move the money from GoldState and WestState into a conventional-taxed fund, tax of up to 15 per cent will be payable. You will probably need to do this anyway when the existing ABP runs out.

When the tax is paid, the net amount in your superannuation will be even less and that might place you in an even better position with respect to Centrelink’s asset test.

In any event, from the information provided you are already eligible for the Commonwealth Seniors Health Card.

That card is not asset-tested and unless you or your partner have other taxable income not mentioned here, you are well under the couple’s $158,440-a-year threshold to qualify.

Question

My 35-year-old son moved overseas to work more than five years ago.

He has married and has two children in the UK. It is highly unlikely he will ever move back to Australia.

He has nearly $90,000 tied up in a superannuation scheme here which is invested in a cash holding account within the fund.

His UK employer has a retirement pension scheme and he now contributes to that.

They hope to buy a home in the UK in the near future and would like to cash out the superannuation here to use it as a deposit.

Given that he no longer lives here, is that possible?

Answer

Australian superannuation laws don’t normally make special concessions for citizens living offshore, even if it is on a permanent basis.

The underlying principle is the possibility that he might one day return to Australia and will need his superannuation to supplement or provide a retirement income.

For that reason, if he is a permanent resident of Australia or an Australian citizen, normal superannuation access rules apply, which means he will need to reach retirement age of at least 60 before he can access the benefits. Even renouncing citizenship and becoming a citizen of another country is unlikely to work as he was a permanent resident when he left.

Only temporary residents can access superannuation when they leave and this can be subject to tax of up to 65 per cent.

Given that your son is in his mid-30s and has at least 25 years until he can access his superannuation, he should make sure the funds are appropriately invested.

While it may show short-term volatility, he should consider moving the funds into an investment option such as the growth option. Presently, the returns he receives invested in the cash option will be close to nil after factoring in tax and administration charges.

By moving to a more aggressive mix, the average returns over 25 years could be about the 7 per cent mark. The downside of this is he may experience a negative return every three years or so.

Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association