Nurturing your nest egg in a downturn

by 17 Mar 2009

Millions of Australians will have seen a decline in the value of their superannuation balances in 2008, and many are now unsure about the financial advice they have received. Teresa Russell reports

There’s no getting around it. 2008 was a very bad year for world stockmarkets. Last year, $680 billion was wiped off the value of Australian shares, with our S&P/ASX 200 index falling 40 per cent in 12 months. Stockmarket indices everywhere fell by similarly sizeable amounts.

In addition to the dramatic slump, the market experienced unprecedented volatility.

Although volatility and downturns are part of the nature of investment markets, recent downturns were short-lived. Most economists believe that today’s stock markets will stay depressed for a longer period, making this the first prolonged downturn in 22 years – and the first since the Superannuation Guarantee came into being 16 years ago.

Around $1.1 trillion of Australians’ superannuation assets are invested in the financial markets. A string of high-risk, high- return investments have also inevitably failed in this investment environment – erasing the nest eggs of thousands of unsus pecting retirees.

This downturn has almost everyone’s attention.

Financial advice

When you need advice about financial matters, many people turn to one of Australia’s 15,000 licensed financial planners. Julie Berry, Chair of the Financial Planning Association, says that people who are approaching retirement, facing redundancy or concerned in any way about their current investment strategy should seek professional advice about their assets and liabilities.

“Financial planning is not all about which product your superannuation should be invested in. Someone made redundant or about to retire may be entitled to Centrelink benefits or may find that a lump sum payout is best used to pay down a mort gage or invest in superannuation. A financial planner helps clients understand complex tax implications,” says Berry, who urges people to seek advice on their individual circumstances.

However, in the wake of the recent high-profile collapses of Storm Financial and Opes Prime, questions have been asked about the quality of financial advice being given to average investors. Many were encouraged to take out margin loans or borrow against their family homes to invest in the share mar ket, only to see the value of their assets collapse as the inter national credit crisis hit.

“You need to have a good understanding [about investment concepts] and not get blinded by higher returns – which are always associated with higher risks. People must really under stand what they are investing in and be able to ask questions of their financial planner without feeling uncomfortable,” says Berry.

Superannuation

The Superannuation Stakeholder Group recently released Super annuation in the Context of the Global Financial Crisis, a joint communiqué from nine of Australia’s peak industry bodies rep resenting investment markets, superannuation funds and finan cial planners. It says that, “superannuation has performed well over the long-term, notwithstanding the poor performance on the markets over the last 12 months”.

Berry agrees. “Young people should be looking at the market as providing a great deal of opportunity, if you are not planning to draw down in the next three to five years,” she says. The com muniqué points out that, “superannuation has significant tax advantages … [Contributions are] taxed at 15 per cent rather than marginal tax rates and there is no tax on superannuation benefits for people over 60 years.”

Fees

Michael Dwyer, CEO of First State Super (FSS) – Australia’s eighth-largest superannuation fund with 520,000 members – says that superannuation fund and financial planning fees are great “barbeque stoppers”. First State Super is the lowest-cost fund in the country and also has a financial planning subsidiary that charges a fee for its service, which can be paid up-front or deducted from a superannuation account.

“Research shows that people find a straight dollar fee far easier to understand than percentage commissions. Transparency is critical to our business,” says Dwyer.

FSS commissioned Chant West to pro vide a comparison of fees charged by lead ing superannuation funds in Australia. Key findings included the fact that, despite leg islation, there is “much inconsistency in the disclosure of investment performance fees and an almost universal non-disclosure of underlying manager fees in … private equity, infrastructure and hedge funds”.

Research conducted by Rice Warner Actuaries shows that the introduction of Super Choice in 2005 has been one of the key drivers of widespread competition. This has seen a significant reduction in super fees paid across all sectors since 2002, except for small corporate and self- managed funds. Average fees for personal super, excluding the cost of advice, are now at 1.47 per cent.

Research for the Industry Super Net work showed that retirees could be an average of $60,000 better off if they pay advisers a direct fee for independent advice, rather than paying the adviser through commissions.

The future

With 44 per cent of Australia’s baby boomers delaying retire ment because of a decline in the value of their superannuation, employers should see higher retention rates among this group and longer periods of transition to full retirement. Employers who provide financial advice, education and information will inevitably increase older employee engagement and retention.

The structure of the financial and investment industry will continue to change, with an increase in not-for-profit funds and a decrease in the total number of funds. Legislation in the finan cial planning industry will tighten to mitigate losses similar to those brought on by Storm and Opes Prime.

With even more of our future savings linked to the fortunes of the stock market, this and all future market corrections will continue to hold our rapt attention.

What it all means

Superannuation: understand options and maximise benefits in retirement through self-education, attending seminars, and/or accessing financial advisers.

Budgeting: helps you take control of your finances and manage drawdown on super.

Employment: Delay transition to full retirement if over 65 by satisfying the "work test" (40 hours in a continuous 30 day period). You get a wage and can invest tax-free into your super.

Age pension: supplement your retirement income, depending on your current income, assets and age.

Financial advice: develop pre- and post-retirement plans based on your individual circumstances using a licensed financial adviser.

Source: Superannuation Stakeholder Group