PSA: Superannuation - The Hidden Costs of 'Pooled' Investment Options

• 

  Mokr on 31/05/2023 - 14:53

  +2

  This is generally why I am choosing to sit tight in my current super fund, Aware Super, who have low fees, passive investment options and an easy to use interface.

  However, I am also eagerly awaiting to see what Vanguard’s long awaited offering in the Australian Superannuation market will be. I am hopeful it will bring the low cost and transparency that Vanguard are famous for to a sector that desperately needs more transparency. But until such time as I can see the offer, I can’t make any judgments!

  • 

    djkelly69 on 31/05/2023 - 15:06

    +2

    Vanguard website says it is live?

  • 

    cashless on 31/05/2023 - 15:29

    +1

    Vanguard super really does not offer anything special at all

    • 

      Daniel Plainview on 31/05/2023 - 15:48

      +1 it's a very mediocre product thats trying to ride of the brand name.

      Vanguard Australia rorts us for fees, compare their products and fees vs the US ones and its well known that they are just taking the mickey e.g for no good reason using very inefficient account practices on their VDHG product which results in much higher capital gains for investors than SHOULD occur, taking many of their US funds and repackaging them for Aussies but marking up by 300%+ e.g VGE, grossly overcharging for VAS when IOZ and A200 are half the price and less (and the last 100 co's in VAS's ASX300 makes up 3% of it's total weight so is near pointless to impacting it) etc - many examples out there on how they are very greedy in the Australian marketplace with fees etc.

      • 

        SBOB on 31/05/2023 - 17:29

        -1

        for no good reason using very inefficient account practices on their VDHG product which results in much higher capital gains for investors than SHOULD occur

        'much higher' is a poor explanation/summary of vdhg setup and it's tax impacts

        In reality, if you compared it to something like dhhf for a period of say 20 years and a few hundred $k, I would expect the end result would disagree with 'much higher'

        • 

          Daniel Plainview on 01/06/2023 - 09:10

          @SBOB: So I had to give a thorough explanation of my assertion or it needed to be neg'd by you? Seems a tad harsh but ok.

          I will leave this here as I think the guy might know a thing or more about the area than yourself - but thats just my opinion:
          https://passiveinvestingaustralia.com/how-is-vdhg-tax-ineffi…

          FWIW the author has posted publically correspondence he sent to Vanguard Australia asking them why they chose to continue to use a highly inefficent accounting methodology that penalises investors rather than using superior approaches and was completely ignored by them. It was a very eloquent and well written request by a highly savvy person in this sphere, that Vanguard couldn't even respond does say a lot about their attitude IMHO alone.

          • 

            SBOB on 01/06/2023 - 10:00

            -1

            @Daniel Plainview:

            So I had to give a thorough explanation of my assertion or it needed to be neg'd by you? Seems a tad harsh but ok.

            I havent negged a single one of your posts in this thread, so perhaps get down off that high horse. But thanks for adding ones to a couple of my posts :)

            and as i said, 'results in much higher capital gains' is a poor summary. Yes, it has marginally higher tax burdens but over the course of an investment, you're paying those CGT's at some point, the difference is whether you pay them during gains time or sale time.

            I dont think you're actually understanding a lot of the points that are made on that site and over inflating them, and perhaps someone else thinks similarly and downvoted a few of your posts rather than respond with information or discussion.

  • 

    brad1-8tsi on 31/05/2023 - 21:03

    Aware Super,

    I've been with Aware for 13 years.
    Their fees are low but definitely not the top 10.
    I'm not convinced about their passive investment options unless they've changed dramatically in the recent re-hash that involved almost 4 weeks of not being able to access my account online. I'm sure they have "experts" fiddling around the edges.
    Transparency? There wasn't a lot of that when they bought the financial planning company that's lost millions and the CEO that gave the purchase the green light quietly slipped out the back door.
    I have 3 Accumulation/Pension Accounts and a diverse share portfolio and Aware sits there doing nothing while the other funds gain value. It's been like that for years.

• 

  Kongzi on 31/05/2023 - 14:55

  -3

  Spam

• 

  onceupon8 on 31/05/2023 - 15:10

  +4

  This is important information that people should be aware of. And the more people who are aware of it and take action will force the superannuation companies to take action.

  But in summary, the savings from a direct investment account vs a pooled account only happen if you have more than around $300,000/$400,000 in your superannuation. So if you are below this amount, you are still better in a pooled account as the fees are more expensive in a direct investment account.

  • 

    Daniel Plainview on 31/05/2023 - 15:43

    +1

    Respectfully I'd disagree with your assessment of the crossover point of where it's 'cost effective' to move from pooled funds to direct investments. As there's a lot of very cheap 'member direct' options out there e.g Choiceplus with Hostplus. Now this said they're a hybrid type product with a bunch of restrictions that i won't complicate things with here.

    But when you compare the tax efficiencies ALONE of being able to keep all the unrealised CG on your account balance and working for you experts have said it's worth 0.5%p.a minimum.

    I'd say $50,000 is enough for CHoiceplus (as an example) when setup to be on par with the pooled options. But its not a precise equation unless you run with a whole bunch of assumptions on the fees you're otherwise paying etc - but $250k+ is well into the 'viable for a SMSF' territory, so Member Direct options are viable well before this and are a great pathway for folks who want to sensibly move to a SMSF in due course once their balance has grown.

• 

  SBOB on 31/05/2023 - 15:10

  also difficult to compare differences between funds and get simple break downs on managed vs unmanaged options
  Currently sitting in 'High Growth' Australian Super. Tried investigating their members direct option before but lost enthusiasm and motivation (and also when i last started trying to look at it, seemed their fees were worse than elsewhere)

  • 

    Daniel Plainview on 31/05/2023 - 15:36

    Yes, the entire industry is setup to make things deliberately opaque and difficult to truly see what you're getting. IMHO it must be one of the very last financial areas when folks are being taken advantage of terribly by lack of transparency in what they're really paying.

    And as i said, while we're now all aware of fees and investment returns - these are equal to in importance with the tax efficiency of the super setup…and while pooled funds are cheap and easy, they're terribly inefficient.

    I mean just not having the ability to carry capital losses forward into subsequent financial years is HUGE in costing you - thats every negative years returns gone, whereas with direct investment options (lots of ways to do this) this would be available to offset future gains. Sounds like nothing but when you consider a negative year might be one in 7, thats a massive amount over the life of your super.

    And this is just one of many 'features' of pooled funds you'll never know about as they'll keep it in the small print of their PDS (Hostplus' is 125 pages!)

    • 

      SBOB on 31/05/2023 - 15:48

      I mean just not having the ability to carry capital losses forward into subsequent financial years is HUGE in costing you - thats every negative years returns gone, whereas with direct investment options (lots of ways to do this) this would be available to offset future gains. Sounds like nothing but when you consider a negative year might be one in 7, thats a massive amount over the life of your super.

      This doesnt seem correct from my understanding.
      There is a tax drag from pooled funds as the 'pool' shares the weighting of cgt events from others in the 'pools' selling and resulting re-shuffling of weightings.

      Theres no inherent loss of cgt gains or losses not being applicable across the pool for subsequent years. If you're within the same pool over that period, you're gains/losses over those years apply across the fund pool.

      Most of the issue occurs on that transitional year and how many funds dont handle it well, where self managed or non-pooled asset ownership being able to be held across that transitional time is of benefit, rather than it being considered a transitional/taxable change

      Items like this are better if you break them down into simple numbers with for and against comparisons between options. Walls of text actually just make it more confusing and less clear on what the key points and issues are.

      • 

        Daniel Plainview on 31/05/2023 - 15:55

        +1

        I don't pretend to be able to convey the complex tax issues as eloquently as those two articles I linked - so I apologise for that.

        But it is correct that pooled funds are not able to bring forward capital losses into subsequent financial years - thats a fact, it's hidden away in Hostplus' PDS when it's speaking about their pooled funds and if you move from them into their direct options.

        As I said the pooled funds seem great as they're cheap and seem simple - but they're actually much more expensive in their true costs (lost returns and higher/inefficient taxation). There's a reason they're offered as the preferred option by every single super fund - they're highly profitable and easy for them to administer - I'm just urging folks to delve a little more into what they're really getting and what the other options are as it makes a huge difference. :-)

        • 

          SBOB on 31/05/2023 - 16:10

          @Daniel Plainview:

          are not able to bring forward capital losses into subsequent financial years - thats a fact, it's hidden away in Hostplus' PDS when it's speaking about their pooled funds and if you move from them into their direct options.

          but the majority of those capital losses have already been applied to your pooled funds 'value', which would apply on that transition between assets, but any unrealised losses or gains would not be transferrable (as they haven't been accounted for yet). Its not an entire years cgt events (either positive or negative) that only get applied at EOFY time.

          I think i'd need to see a more detailed or better explained breakdown of what point you're trying to make (or point you think you've captured from some article) with regards to some of these CGT impacts in super, as I'm either way off the mark in my understanding or you're over-blowing the actual impacts have to most peoples interactions with these pooled asset structures (ignoring the single last year transition from earning to retirement, which some funds have started to implement better options for)

          • 

            Devils Advocate on 31/05/2023 - 18:14

            @SBOB: SBOB is correct, OP you are confusing two types of capital gains tax.

            In a pooled trust there is:
            1. internal capital gains, which is paid internally on rebalancing and redemptions (by other members).
            2. the capital gains that you pay on the increase of the unit price which you hold.

            The 1st also occurs in other trust investments, like managed funds and ETFs. The tax consequences aren't ideal, but it is much better than the alternative of an non-diversifed investment. In short, it is hard to avoid this.

            The 2nd you only pay when you sell the investments and realise the gains, which in superannuation is usually in retirement (when 0% tax rates can apply).

            Lastly, remember this is a concessional tax rate of 10% on the gain. Usually much better than payingy our marginal tax rate outside of super.

            • 

              Daniel Plainview on 01/06/2023 - 09:23

              @Devils Advocate: So you're saying the articles linked in the OP are incorrect?

              i don't want to get above my paygrade on this - but I agree it's a complex area as CG occur in multiple different ways. My understanding and that of both those articles is that poled funds deal with them in a manner that is far less tax efficient than direct investments.

              This is at the very heart of what i'm trying to convey as I don't think folks are aware of this or might feel it's a trivial or small difference at best, which over the lifetime of their super account it most certainly is not.

              Some super funds handle capital gains a little bit differently than others - but as i said THAT there's been a huge increase in the number giving 'retirement booster/bonuses' in the last few years alone - as when the articles were written only 2 funds were doing this….and now there's over a dozen, tells you a LOT as they've always known how their accounting screws investors and yet what about all the poor sods who came before this? And all the provisioned Capital Gains that come off accounts in years other than your final one before reaching pension phase?

              I've been waiting over a week for Hostplus to contact me to explain the approach they use to handling capital gains on their pooled funds and still no response to what should be a pretty simple question.

              Fund managers are deliberately opaque on how they handle capital gains on your super - this is for good reason as it's something investors are blissfully ignorant of - but as I said I will defer to the authors of those articles to explain that better than i ever could.

• 

  tsunamisurfer on 31/05/2023 - 15:19

  +1

  EVEN WORSE is when workers who've toiled away for years and finally trusting the system move from 'accumulation' phase to 'pension/preservation' phase - as they'll FOREVER lose whats most likely the largest amount of capital gains tax they ever get on their account due to this accounting methodology e.g $1,000,000 balance 10% CG in the last fin year (which is close to the 10yr average for Hostplus's Balanced option), $100,000 capital gains, ATO taxes this at 10% - $10,000 lost in that year alone!

  WTF.

  This is false.

  If you move your investments from accumulation to pensions phase within the same fund :

  a) You will simply transfer those investments and not trigger a CGT event.
  b) If you then want to sell those investments and cash in all the unrealised gains, you can do it in the Pension account (some eligibility rules apply) where it is CGT exempt.

  • 

    Daniel Plainview on 31/05/2023 - 15:30

    -1

    Please check the articles - I'm not talking about CGT that would occur if you sold the holdings you had whilst you were in accumulation phase - I'm talking about that last financial year of unrealised capital gains, where the member does not sell a single dollar of them - but they're provisioned off their account - as thats the way pooled funds work when you accumulate capital gains, they take them off as you accrue them - not when you actually realise the capital gain - which is a huge difference.

    And that huge last years CG is gone forever, just like all the unrealised CG from previous years - which might be a huge amount if the worker had been 'good' and left it to accrue.

    But respectfully your 'WTF' tantrum is incorrect as your example is technically true it is not actually what i am trying to convey. I'm just trying to have folks look into a matter that most of us see as too complex or into the future, no benefit here for me. :-)

• 

  noone on 31/05/2023 - 16:22

  +1

  I think what OP is trying to say is summarised better in the linked article

  "So say you have $500,000 of which $30,000 is unrealised capital gains tax payable if sold, let’s take a look at the two different situations when you move to pension phase:

  Public super fund — you only see $470,000 when you login; furthermore, it is considered selling and rebuying when your $470,000 (after tax within the fund) is moved to a pension fund that will then hold $470,000. This is because the same investment option (e.g., Australian shares) in an accumulation account and a pension account are different funds because each is subject to different rates of tax and tax is paid at the fund level. So while you never see the tax taken out (because you are shown the after-tax amount when you log in to your accumulation account), it is lost as it is ‘sold’ from the accumulation fund (incurring tax) before it is moved to your pension account.
  Individually taxed options — you see $500,000, and $30,000 of it is unrealised capital gains tax; when you move from an accumulation account to a pension account, it is not considered selling down, so no tax is paid on the transfer, and you get $500,000 in your pension account; furthermore, as you are now in pension mode, no tax is paid, and the capital gains tax accrued from all those years never needs to be paid."

  • 

    SBOB on 31/05/2023 - 17:27

    Though some funds are improving their transition to pension phases, which would lessen some of those pooled impacts.

    I think an excess of words in the op is making the explanation and 'psa' style post more confusing than it needs to be :)

    • 

      Daniel Plainview on 01/06/2023 - 09:59

      Whats your angle here?

      Could I have expressed it better, 100% it's not my domain or skillset and it's a bloody complex subject.

      Hence I gave articles which I think cover the subject very well - and stated I encourage folks to read other articles on both those sites as they're well written and pertain to average Australians.

      It is a PSA - as folks on here are all about saving $$$ and nearly all of us have super and nearly all of us have it with the big super fund managers and within their seemingly cheap pooled investment fund options.

      Super used to be an area we were all very ignorant of and we paid huge fees on terrible investments that went nowhere, but we know better now which is why the industry funds have had a huge boom in size and funds under management - as they promise to be cheaper. And they are….in some ways.

      I'm trying to flag to folks who might be in these and havent read the 125+ page PDS on them that there's some stuff thats less than ideal - which makes a huge difference in the long term to your end balance. What they do with that info is up to them as regardless big super funds have convenient, simple products that can work out very nicely for folks. I'm not recommending a product or even a style of product, just saying - 'I wasn't aware of this, perhaps others might feel the same way'. No more no less.

      • 

        SBOB on 01/06/2023 - 10:04

        Whats your angle here?

        I dont have an 'angle'. its a finance topic, of which i have an interest and decent basic understanding of

        You're not explaining your point clearly, or over emphasising/conflating issues in a confusing manner, and raising other 'issues' which you dont see to fully grasp and claiming them as problems with investment options.

  • 

    Daniel Plainview on 01/06/2023 - 10:07

    Agree completely.

    And this is only the aspect from the final year of your accumulaton phase in super. So it is the best example of this as generally your balance will be larger than it ever was and if we assume an average rate of return (as we have no idea if its an up or down year) it'd also have the largest capital gain ever on your account. Hence the tax inefficiency is larger in this one year than any other.

    But the tax inefficiency also occurs in other years as well as issues like not being able to bring forward capital losses etc as I mentioned.

    A growing number of funds are trying to address the last year problem - but if you look into the methods they do to achieve this its often very flawed e.g they cap the max amount they can give back etc. So how much of a solution is this? Not much IMHO but it's the canary in the coal mine showing the tax inefficiencies they have.

• 

  azngamer on 31/05/2023 - 16:43

  That's a very long TLDR. Can you please make it shorter? Which super to go for and which option to avoid the hidden cost of "pooled" investment

  • 

    Daniel Plainview on 01/06/2023 - 09:52

    Sorry - I'm slightly autistic and being succint isn't a strength of mine.

    The TLDR version is - unless you understand Super and the tax rules pertaining to it intimately, I recommend you read these articles as there are simple choices you can make that might massively impact your end super balance. :-)

• 

  freefall101 on 31/05/2023 - 18:52

  +2

  I'm no expert, but this line didn't make sense to me in the article

  whereas, with ETFs, you don’t realise those gains until you actually sell.

  I thought gains were realised when the ETF paid a dividend? That income would have a big ol' whack of capital gains

  One example is during the coronavirus market downturn VGAD (the ETF) had no mid-year distribution (due to currency hedging), yet the managed fund version had a distribution due to other investors selling their units

  The fact VGAD wound up holding large capital gains caused the value of the ETF to slump big time when the news of the distribution came out. So while you're not triggering a capital gain it did hugely decrease the value of the ETF by the capital gains amount.

  For anyone reading this, remember it's some dude with a blog who's saying something that's unsourced. I really, really, really suggest getting your own advice and treat this as it is - the random, untested and unproven ramblings of someone on the internet who had enough money to sign up their own URL.

  • 

    Daniel Plainview on 01/06/2023 - 09:47

    A dividend is not a capital gain, it is income. Within an ETF's annual tax statement there will be capital gains that have occured (even if you didn't sell a single unit) but thats yet another variant of these. Suffice to say it's a complex area but one folks should be aware of if they're investing in super or ETFs directly (within or outside of super).

    I think that the VGAD example you gave confused you - is indicative of that alone, not sure what about whats said by the article seems contradictory or incorrect.

    You're being a tad overly simplistic saying it's just a due with a blog - the writer of the passive investing australia site is INCREDIBLY highly regarded on multiple financial forums - obviously you can disagree with his assertions but rather than just saying "Fake news" you could actually document why you feel what they state is incorrect. :-)

    • 

      freefall101 on 01/06/2023 - 10:07

      A dividend is not a capital gain, it is income. Within an ETF's annual tax statement there will be capital gains that have occured (even if you didn't sell a single unit) but thats yet another variant of these. Suffice to say it's a complex area but one folks should be aware of if they're investing in super or ETFs directly (within or outside of super).

      I don't think you quite get how tax flows through an ETF. The ETF doesn't generate any tax itself, it's passed on to the individual. That's true of what happens when a dividend is paid, that then passes on. So if a dividend is paid that is made up of capital gains then your SMSF needs to recognise the capital gains that year. A good writeup on what has happened with VGAD is here - https://www.morningstar.com.au/insights/etfs/213949/etfs-and…

      People should be aware, but the idea that it's essentially capital gains free is misleading. It will have lower capital gains impact but not zero because of how the dividend is paid out and the value of an ETF carrying capital gains varies to a managed fund because of the capital gains impact.

      You're being a tad overly simplistic saying it's just a due with a blog - the writer of the passive investing australia site is INCREDIBLY highly regarded on multiple financial forums - obviously you can disagree with his assertions but rather than just saying "Fake news" you could actually document why you feel what they state is incorrect. :-)

      I never said it was fake news, I said to take it with a grain of salt. Those are entirely different things. It's not incorrect and I don't disagree with his general assertions but it's not the whole picture. There's more to it than just buying ETFs instead of buying into a fund and the intricacies of that aren't explained.

• 

  YRT on 31/05/2023 - 21:41

  +1

  I'd say get SMSF once you have $100k+. For this amount, fees tend to compare with managed funds. You also have the flexibility to invest in things you truly believe

  • 

    Daniel Plainview on 01/06/2023 - 09:50

    Agree but I do think that $100k is too low….I mean if you're in the right investments an SMSF can 'work'(i.epay for its higher costs) from a financial perspective at a much lower level BUT popular opinion is that an SMSF is cost viable around the $200-250k level - whereas previously the ATO had claimed it was $500k, which has since been disproved by independant persons running the 'average' numbers - as all these things are huge generalisations and whats right for you, me or Joe down the street might be completely different.