Make sure your pension fund ticks all the right boxes when you retire, writes John Kavanagh.
For most people, the big financial decision they make when they retire is how much of a lump sum to take out of their superannuation account and how much to convert to a pension account.
Most retirees setting up a pension usually opt for an account offered by their existing super fund.
Few shop around for a pension provider. But more should.
Retirement-income products are among the most expensive of all super products and it is sensible to do some homework to make sure you get value for money.
The research manager at Canstar, Chris Groth, says account-based pension providers charge a wide range of fees. The Canstar website lists account-based pensions with no annual fees and others with annual fees of $400.
Many have no initial fee but those that do have contribution fees charge from 3 per cent to more than 5 per cent.
"When investment returns are low - as they have been over the past five years - fees can eat up a big part of the return," Groth says.
"You can't predict what the returns will be but you can control costs by making sure you are in a fund that offers value for money."
This month, Canstar published its account-based pension ratings, which take into account member benefits, transaction fees, investment options, insurance cover, functionality, accessibility, income-payment options and financial advice.
For retirees with balances of about $400,000, it gave five-star ratings to seven pension funds: AMIST Pension, AMP Flexible Super Retirement Account, First State Super - Superannuation Income Stream, Media Super - Retirement Pension, MLC MasterKey Pension Fundamentals, SMARTpension and VicSuper Commutable Pension.
Groth says the big differentiators between funds were fees and functionality. "People want to be able to deal with their fund online and have payments processed quickly," he says. "For people with smaller balances, fee levels are critical. For people with large balances, the range of investment options takes on more importance."
The research manager at SuperRatings, Kirby Rappell, says he puts more emphasis on the quality of a fund's administration when he is rating account-based pensions.
"When you are in the pension phase, the administration becomes more important because you have more needs," Rappell says. "For example, in addition to regular income draw-downs, retirees might want one-off payments for particular requirements.
"People want to be able to go online, complete the transaction and have the money in their account within a few days. Some pension funds issue ATM cards.
"They don't want to be mailing in forms and waiting weeks. Flexibility is very important to retirees. Price is important but if you are getting access, convenience and flexibility, it may be worth paying a bit more."
SuperRatings listed 10 pension funds as finalists when it selected its 2012 pension of the year.
They were: AMP Flexible Lifetime Allocated Pension, AUSCOAL Super Account-based Pension, AustralianSuper Pension, Catholic Super Pension (the winner), Club Plus Pension, HOSTPLUS Pension, Russell Private Active Pension, Sunsuper Income Account, Vision Super Allocated Pension and OnePath OneAnswer Frontier Pension.
Rappell says the process of changing providers is not difficult. In most cases, you give the new fund your old fund details and they handle the transfer.
The principal of Rice Warner Actuaries, Michael Rice, says pension funds are more expensive than other types of super funds because there is more client service involved.
For example, call-centre activity is higher and retirees ask for one-off payments, in addition to their regular draw-downs.
Rice says fees often go up when people move from work to retirement because the retiree is moving out of a corporate or public-sector fund, where fees are charged at a wholesale rate, into a retail pension fund.
He says this is something people need to check as part of their planning. If they find they are moving from a low-cost accumulation fund to a high-cost pension fund, they should shop around.
But he warns that people should not just look at the fees. "Fees vary because the services offered in different types of funds vary, meaning the comparison is not always like for like," he says.
Pension drawdown rules
One of the rules governing pensions set up with superannuation money is that a minimum payment must be made out of the account each year.
Minimum payment amounts are determined by age.
The rule is designed to make sure retirees draw down on their super through their retirement.
The government has made a number of adjustments to the drawdown rule since 2008, with the aim of helping people preserve their capital if their savings have been knocked around by the financial crisis.
Minimum drawdown requirements for the new financial year are the same as for 2011-12.
Under 65 3 per cent.
65 to 74 3.75 per cent.
75 to 79 4.5 per cent.
80 to 84 5.25 per cent.
85 to 89 6.75 per cent
90 to 94 8.25 per cent.
95 or more 10.5 per cent.
The government's plan is to restore the minimum amounts to their full value next financial year (2013-14), so the minimums will go up by one-third (the minimum for a retiree under age 65 will go from 3 per cent to 4 per cent).
Advisers say that where retirees can set their drawdowns at the minimum level, they should. By reducing income from their pension, they're preserving capital for as long as possible.