You often hear people say that their super fund has performed poorly in relation to other types of investment. In many cases they are right. But there are a few reasons why super fund performance can appear worse than it really is.
After tax vs before tax returns.
Most super fund returns are quoted on an after tax basis, because taxes are already paid within the fund. Returns for non super investment still need to take into account the personal tax payable on that investment. For example compare a super fund return of 8% to a non super investment return of 10%. At face value the non super investment looks better. But the after tax return of the non super investment is likely to be nearer to 8% once tax is deducted, and could be as low as 5% depending on specific investment type and individual tax rate. The super fund’s return of 8% has already been calculated after tax.
Life insurance premiums
Sometimes the balance of a super fund doesn’t increase as much as people feel it should, and the underlying cause is insurance premiums being deducted from their fund. Life insurance is one of the few things you can pay for with super while you are still working. And it can often be more tax efficient than paying for the same amount of insurance outside super. However bear in mind that using super to pay for life insurance will decrease your super balance, and potentially create the appearance of performance being worse than it is. Life insurance is not compulsory in super, so get professional advice about changing it if you think your insurance is unnecessary, too expensive, or if you prefer to pay for it outside super.
Short term focus
Super is a very long term investment for most people. Much longer than almost every other investment they will ever make. Therefore, most super funds are designed to maximise returns over a longer period, and they can often achieve this by accepting occasional short term losses as part of their investment strategy. Poor performance over a short term period may not be any cause for concern at all. In many cases it’s actually indicative of an investment strategy that delivers high performance over the longer term. When assessing a super fund’s performance what really matters is the fund’s investment strategy and its longer term performance (at least 5 years).
OK, so that’s a few reasons why super funds may appear to have worse performance than they actually do.
But unfortunately many super funds do underperform over the medium to long term. When that happens it is usually due to poor investment strategy or excessive costs. Super funds are allowed to invest in most of the same things you can invest in outside of super, so ideally your fund should have scope for a broad range of good investment strategies suited to your situation. You are not restricted to what your employer chooses for you. There are also plenty of low cost super options these days, and virtually no modern super funds still have commissions.
If you feel like your super fund is underperforming, and you are confident it is not due to any of the reasons mentioned in the first part of this article, it may be time to get advice about alternative options.
Please send us a message if you would like some assistance with this.