Industry vs Retail Super -How to Decide?

I am tossing up between investing my super in an industry fund (eg. Australian Super Balanced) or a retail fund (eg. one of Vanguard's diversified index funds).

I don't have any super at present, so I'm starting from scratch. Based on the current super rules, I'll be able to get in almost $600K.

My FP has recommended investing my super in a Vanguard diversified index fund (I will more than likely be investing my non-super shares in a Vngd diversified index fund, so my FP has suggested investing both super and non-super the same way).

The fees for both a Vanguard and Industry fund are similar. The performance is also pretty similar.

I will be switching my super to pension phase (within the next couple of years) and withdrawing the minimum (around 4%). I will top up my income with my share portfolio.

Is there anything else other than fees/performance that I should be considering before deciding on which to go with?

I overthink everything, so perhaps I'm just overthinking it.

This tool is pretty cool for comparing industry super funds:
Super AppleCheck

 

Oh, that's strange. The tool is the Chant West super applecheck tool.

You can access the tool by clicking the below link and then scrolling down to the applecheck tool (it’s a big apple, you can’t miss it!):

Compare Super Funds I Compare Performance & Fees I AustralianSuper

 

Intriguing. How can you put $600K into super?

 

If you are going to need to rely on your investments for income it's really important to consider your access to cash and work with your FP to make sure you have enough reserves so you aren't forced to sell down investments at inopportune times.

Consider what would have happened if people were being forced to sell investments through the March-April period of last year after in a lot of cases significant falls - very hard to make those losses back if you sell at a lower price and then have a smaller capital base to capture any price increases.

This is even more important in the current world where dividends/distributions alone may not be enough to meet minimum drawing requirements for your pension fund.

 

Concessional and non-concessional contributions plus utilising the bring forward rule (so not all at once).

 

I am keeping a good buffer in the bank (likely around 3 years' income), so I should (hopefully) never have to sell down. I'm also aiming for an income which is higher than what I actually need to live off, so if there is a downturn, I will be able to manage on much less if need be.

 

Not only that but a cash buffer within superannuation is needed also since there are minimum pension standards to meet each financial year.

It's less of an issue when you are younger and required drawings are low, but as you get older your minimum drawings increase under current rules.

 

Could you please tell me what that means?

I know that once I switch from accumulation to pension phase, I will have to draw down the minimum, which is around 4% I believe. Are you saying that there needs to be a cash buffer within super in case the share component is lost during a downturn? ie. so that I would continue receiving 4%?

 

So once you switch to pension phase you need to draw your minimum based on age - normally 4% for under 65, 5% for 65-74, 6% for 75-79 etc up to 14% for 95 or older.

If you have a requirement to withdraw at least 4% each year and you only had for example the vanguard fund within your superannuation account, you would have to sell around 4% of that investment to meet your drawing needs.

If the price falls sharply then when you are selling that investment it is worth less per unit. If that price doesn't recover quickly, you may have to sell another 4% worth of that fund again. What happens if this situation continues on for more than a couple of years?

At least if you have a cash buffer within your account you can draw on your cash to meet the requirements and hope the price of your investment starts to recover.

 

Thanks for explaining that so clearly. I didn't realise that they force you to continue withdrawing 4% (or the appropriate %) once you switch to pension phase.

So does a cash buffer mean actual cash or fixed interest/bonds?

I know the pre-mixed AusSuper balanced option has a cash component, but the Vanguard Diversified Index Funds do not (they have fixed interest/bonds).

 

Did your FP provide you with a Statement of Advice outlining the recommendation to switch to pension? Basically there is a minimum annual payment that's required based on your age and account balance as at 1 July each year (or the starting date of your pension if you start it part way through the year).

As to whether to use an actual cash buffer or defensive assets - it depends on what type of fund you are using as to how best to implement it. That would be something you work with your FP to manage and personalise.

The AusSuper balanced option has a cash component within it, but it's still part of the broader investment option which is subject to market movements.

 

Yes, they have provided something but I don't fully understand it (I am clarifying it with them next week). They seem to have set up two super accounts for me when I switch to pension phase -a pension account and what looks like another account with $10K in it. Is this likely the cash buffer you mentioned? A $10K buffer is not going to go very far.

Ok, thanks.

So what do people who invest in an industry fund, such as AusSuper's balanced option, do for the cash component? Do they just have a cash component alongside their balanced option? Or do they not have a cash component and just hope for the best?