SMSF Strategies

1 per cent of Australia's GDP goes on super fees

24 Jun 2014 87 month(s) ago

1 per centThose who let other people manage their super funds are paying three times what they should, according to Treasury. It merits close attention if you want to do as well as you can for your retirement.

1 per centNo less an authority than the Commonwealth Treasury says Australians are paying about $14 billion more in super fees than they should. Treasury estimates that the total is $20 billion per year in superannuation fees. It is calculated to be about three times as much as they need to. The Age reports that the amount is the equivalent of 1% of Australia's GDP -- an extraordinary amount:

"Addressing the Committee for the Economic Development of Australia on Monday, Treasury director David Gruen said super fees averaged $726 per year for members with a fund balances of $50,000.

There was little evidence to suggest the fees were value for money. On average high fees were "simply a net drain to investors".

"A microeconomic reform that permanently reduced costs across the economy by a few tenths of 1 per cent of GDP would be considered a significant and worthwhile reform," Dr Gruen said.

Significant reductions in fees would have "widespread benefits for society as a whole"."

The Grattan Institute has estimated that if fees were halved the final lump sums would be 15% higher, and retirement incomes 20% bigger. It gives some idea of the potential value of doing your own super, if the administrative costs can be contained. The Greatan Institute suggests a bog government solution, which may provide scale, but could lead to other problems:

"The Grattan Institute recommended removing from employers the power to select default funds and giving it instead to a government-appointed body that would conduct a tender for the right to manage all new default accounts each two years.

After ascertaining that the tenderers were appropriately qualified the government would award the tender on the basis of price."

Ideally, the best way to contain super fees is to do it yourself. But it has to be a large enough fund to afford the administrative costs.

Another likely response from government is to extend te retirment age. There are some suggestions being made that in the final phase of life, annuities should be favoured. This makes some sense, because in that phase income rather than wealth accumulation would be the emphasis. It also addresses the issue of mental deterioration:

"The Australian Research Council Centre of Excellence in Population Ageing Research has pressed the financial system inquiry to consider making lifetime annuities compulsory past the age of 85.

On retirement each Australian would have to take out a policy that would pay out for the rest of their lives beyond the age of 85.

The policies would be cheap, the Centre says, because of the "mortality bonus". Many of those taking out the insurance would not live until 85 and many of those who did would not live too many years beyond that.

The Centre recommends allowing earlier access to the lifetime annuities if "serious cognitive decline" sets in earlier."



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