David Koch’s guide to help you decode your super statement

Superannuation is the third-most important weapon you have in your ability to build wealth, behind your capacity to earn income and owning your family home. The issue is that because it gets compulsorily deducted from our wages each month, we often don’t give it the attention it deserves.

This week, end-of-financial-year super fund performance figures were released. So you’ll receive the annual or bi-annual performance figures. Promise me you will open the letter or email and read how the fund has performed.

Read your super statement

Many of you probably never read your super statement, preferring to file it away the moment you receive it.

Don’t make that mistake.

To give you a benchmark on whether you’re in a dud fund or not, leading super research house SuperRatings estimates that the median balanced option returned 1.2 per cent over the month of June, for an annual return of 8.5 per cent for the year to June 30. Note that in the previous financial year balanced funds went backwards by -3.4 per cent.

If you’re in a balanced super fund option you’re looking for an average return of 8.5 per cent on your statement. If it’s higher, great, you have a fund doing better than the average. But if it’s lower, you need to find out why and, if it’s consistently lower, maybe you need to switch to a better fund.

According to SuperRatings if you’re in a growth-oriented super fund it should have produced a return of at least 11.1 per cent for the financial year and 4.5 per cent for a conservative capital stable fund.

Pension returns also ended the financial year strongly, with the median balanced pension option up an estimated 1.3 per cent over June. The median growth option rose by 1.6 per cent, while the median capital stable option is estimated to deliver a 0.3 per cent return for the month.

A fund needs to be measured on how consistent its returns are over the long term. The chart shows that the average annual return since the inception of the superannuation system is 7.1 per cent, with the typical balanced fund exceeding its long-term return objective of beating inflation by more than 3 per cent. That’s pretty good; a “real” return of 3 per cent.

How to read your super statement

Here’s my jargon-free guide to help you decode your super statement.

1. The snapshot

The first page of your super statement is generally a snapshot of your account.

Your account balance will be shown at the start of the statement period, usually July 1 on the previous year. You’ll then see a record of all the contributions and withdrawals you’ve made and the total value of fees insurance premiums and taxes you’ve paid. along with your total earnings.

2. Preservation status

Super is classified either as preserved, meaning you can’t touch it, or non-preserved, meaning you can (another classification, ‘restricted non-preserved’, may also apply to contributions made before June 30, 1999).

Your super will be preserved until you meet a condition of release such as reaching your retirement (or preservation) age, or in a small range of special circumstances.

3. Investments

This section provides details on how your money is invested. See story above.

Most funds offer a number of different low to high-risk options, so make sure you’re comfortable with the strategy you choose. You’ll also see a “unit value” and “unit price” next to the balance. That’s because super funds pool your money together with other investors before they invest it in the market. This pool is divided into units, which you’re allocated based on how much you have invested.

4. Fees

High fees can have a huge impact on your fund. Most funds will hide fee information after a long list of the transactions on your account. When it comes to fees, the lower the better.

5. Insurance

Most funds automatically provide some level of insurance, known as default cover. This is generally a combination of life, disability and income protection insurance. Check the total benefits and review the premiums you’re paying,

6. Beneficiary nomination

If you don’t make a nomination, your fund will decide how your account is distributed in the event of your death. Ensure you nominate where you’d like it to go. And make sure your contact details are current. That way you won’t end up “losing” a fund down the track.

Sharing the wealth

At this time every year I remind share investors that an increasing share price is not the only way to make money in equities.

The power of dividends is often overlooked by investors to their financial disadvantage. Australia has some of the highest dividend paying companies in the world. It’s also generally agreed that shares that pay dividends are more stable and resilient. So dividends offer a stable contribution to a an investment’s total return, reducing the year-to-year volatility of capital gains.

Major Australian companies are paying dividend yields of up to 11 per cent fully franked which, when you consider many fund managers are only expecting single digit returns from share prices, is a powerful addition to your returns.

The list I’ve included are the top dividend payers among our 50 biggest sharemarket-listed companies.

Remember, a fully franked dividend means your payment comes with a tax credit equal to the company tax rate of 30 per cent. It means the company paid its full level of company tax, so shareholders receive a tax credit with their dividend … if they didn’t it would be a case of double taxation.

A good dividend yield can often indicate a company has good cash flow, financial strength, a low share price, or a combination of all three.

While most of us follow the fortunes of our share portfolio each day via their share price movements, that dividend cheque twice a year often goes unnoticed … it shouldn’t.

With many top companies paying a dividend yield of 5-6 per cent, add the impact of franking credits and that yield can jump to an impressive grossed up 7-8.5 per cent.

During the profit reporting season, the focus of the tidal wave of results is usually on the earnings and at times the dividend policy only receives scant mention.

The theory is a top-50 company is usually blue-chip and would have strong cash flow to be able to pay the dividend. But for traditional growth stocks it usually means the market has marked them down for some reason and that’s why their dividend yield is so good.

The potential is that when market sentiment changes, selected growth stocks will move up with the cycle and you’ve locked in a decent dividend yield at these prices.

Beware of the fact that while the dividend yield is good now, you have to be confident the company has the capacity to maintain dividends into the future.

Information and opinions provided in this column are general in nature and have been prepared for educational purposes only. Always seek personal financial advice tailored to your specific needs before making financial and investment decisions.