Super size fees lead to retirement poverty

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Piggy Bank - flickr image by alancleaver_2000Most people in the workforce are preoccupied with making ends meet in the here and now. Home mortgage, food, running a car, school fees, and much more. They don't have time to think about their retirement, and how they might fund the cost of living once salary payments stop going into their bank account.

Banks have recently reduced some of their charges for personal banking products following the campaigns of consumer organisations such as Choice. But they continue to hit consumers with high fees for superannuation accounts because most people don't worry about super until they near retirement.

Last week the Australian Prudential Regulation Authority released its superannuation league tables. Crikey's Bernard Keane pointed out that the banks' in-house staff superannuation funds performed roughly twice as well as their retail funds, which are used by the public.

Keane suggests the difference reflects the impact of fees and commissions charged by banks for the retail funds. The in-house funds, on the other hand, are careful not to impose significant fees or charges. It's likely that this is the case partly because bank employees are more financially literate and therefore harder to exploit than members of the public. Over many years, such an impost mounts up to the extent that it is likely to have a significant material affect on the quality of life that workers are able to enjoy once they reach retirement.



The Edmund Rice Centre's Good Business ethics newsletter says that the Federal Government's Review into the Superannuation System has shown that there are no less than ten different types of fees that need to be taken into account when making informed investment decisions. There are many available options, but most consumers take the default and often more expensive option, because it is genuinely too difficult to read and understand Product Disclosure Statements, Annual Statements and many other documents.

To add to the confusion, there is pressure from governments and consumer advocates for the imposition of fees for some financial services which until now have been provided free of charge. If there's such a thing, these fees are 'good fees', as they are designed to keep financial advisers honest. Such professionals often work for commission from banks and other institutions, and are therefore likely to favour the interests of the banks before those of the people they are advising. Therefore a ban on commissions from banks, and replacing them with fees for the consumer, is likely to give people a clearer idea of what financial product is going to provide best for their future.

Unfortunately the message to consumers is that there's little point in putting too much of their hard earned salary into super if they can't manage to work out how to choose the best options for their particular needs. We hope that the Super System Review, which is due to hand down its report on 30 June, will encourage the government to put in place a mechanism that will motivate and help consumers to take control of funding their retirement. A MySuper website perhaps. It could mean the difference between poverty in retirement, or being able to afford luxuries that enhance their quality of life such as books and travel.


Michael MullinsMichael Mullins is editor of Eureka Street.

Topic tags: superannuation, fees, banks, financial advisors, retirement

 

 

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Existing comments

Our current system of providing for old age pension is unfair and unreliable.

Superannuation funds are run privately and are subject to bad management, high fees and market speculations. Nevertheless, they provide an important part of securing in income during retirement.

A good system to provide security in retirement is a 3-pillar system used in some European countries. It has a Government run pension scheme, which is operated by the Federal Government and is financed by contribution by employers and employees, similar to our current Medicare system. When retirement age is reached, pensions are paid according to the contribution made during the working life. Therefore, there is little or no need to take money from taxpayers to pay for pensions. This pension permits people to have a secure and guaranteed income during retirement.

The second pillar is a system of Superannuation funds, to which companies and workers contribute some funds on a regular basis. These Superannuation funds do provide for additional lifestyle support during old age.

The third pillar is a system of savings, either as investments in Real Estate (family home) and or private savings.
A good 3-pillar system is reducing virtually any need for the Federal Government to pay out tax-funded pensions.

Our current system is also unfair to people who made an effort to save for their old age and rewards people who spent all their money during their working lives. Income tests and assets tests are unfair to hard working people and are based on loony left wing “social justice” ideologies.

Beat Odermatt | 29 March 2010


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