RSAs leave some pockets empty
Sydney Morning Herald
Wednesday February 24, 2010
Retirement savings accounts offer a low-cost, capital-protected alternative to super, but there is a downside. The money sitting in capital-guaranteed retirement savings accounts (RSAs) has hovered around the billion-dollar mark for a number of years but jumped in the past financial year to $6.1 billion, according to the Australian Prudential Regulation Authority's annual superannuation report, released this month.However some people say that even at the top available interest rate of 5 per cent, these accounts are hardly the best way to build wealth for your retirement.The bottom rate on offer from RSA providers listed on the database of financial products researcher InfoChoice is just 1.75 per cent."The variable rates on these types of accounts are not very competitive compared with rates offered for online savings accounts," says the chief executive at InfoChoice, Shaun Cornelius."For example, the highest rate for an RSA on infochoice.com.au is 5 per cent, compared with 5.62 per cent for the top online savings account rate."For those prepared to lock money away in a term deposit, rates as high as 7.25 per cent are available.Even in a superannuation fund, after being pummelled by consecutive years in the red, you'd have earned 5.5 per cent a year across the past decade from the average balanced super fund, according to researcher SuperRatings. Over the longer term, since compulsory super began in 1992 the average balanced fund has returned 6.7 per cent.The Howard government established retirement savings accounts in 1997.Banks, credit unions, building societies and life offices can provide these accounts but, as of July last year, the Australian Prudential Regulation Authority counted only nine institutions offering this facility - the Commonwealth Bank of Australia plus eight credit unions.Retirement savings accounts were intended as a low-cost, capital-protected alternative to superannuation accounts for people with small balances, especially casual workers. The idea was that they could build money up in an RSA then roll it into a traditional superannuation fund.The capital guarantee means employer and individual contributions, along with the interest earned, can be reduced only by fees and charges - not by sharemarket fluctuations, for instance.If the balance is less than $1000, fees and charges can't exceed the interest credited to the account.In other ways, an RSA is very much like a superannuation fund account.As with super, benefits can only be paid out once you reach at least age 55 and you have retired. The same special tax rules apply, with contributions and earnings taxed at 15 per cent rather than your normal personal tax rate.The chief operating officer of retail industry superannuation fund REST, Paul Sayer, says the government may have thought the accounts would be good for people earning small amounts of super through casual, part-time or lower-paid work but the reality is that it is even more important for such people to find a means to "grow" their savings for retirement.Looking at the sort of young worker his fund is familiar with, Sayer argues they have the time and the incentive to look beyond an RSA even when, initially, small sums are involved."You have to ask yourself: 'What's the period of time I want to invest for? And if it's a longer period, why am I moving into a really protected [retirement savings] account?"You need to be in investment markets and ride the ups and downs," Sayer says. "What you're trading off for that protection is you're losing growth and possibly being eroded by inflation as much as you're benefiting from the capital guarantee."You're losing that opportunity of growing wealth."In addition, there's the question of "add on" benefits such as access to cost-effective group insurance through a superannuation fund, he says. Many funds these days offer both life and income protection insurance.Sayer says there's also the danger that consumer apathy means people could possibly fail to make the move from an RSA to a superannuation fund as the government envisaged."Whose interest is it to tell me that I need to move into something different?" he says. The bank or credit union is getting access to funds for just 5 per cent interest and lending them out at 6.5 per cent or more. "The [transfer] point that the government had in mind when they set up RSAs was about $10,000."But you'd want to look at it earlier than that."Sayer says another negative about RSAs is that they do nothing to encourage people to take an interest in their retirement savings."We're all trying to get people engaged and following their superannuation. If a person is actually monitoring their investments, that's a good thing. We want people to look at their super and make decisions."KEY POINTSRetirement savings account balances have jumped.Unlike super, your capital is protected in an RSA.However, the most you'll earn is 5 per cent.RSAs don't have benefits such as insurance attached.
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