YOUR QUESTIONS

'NIL ENTRY' MISNOMER

By InvestSMART · 22 Apr 2012

By InvestSMART ·
22 Apr 2012

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'NIL ENTRY' MISNOMER

I am a 64-year-old permanently disabled person with no debt. I have $25,000 in a OnePath allocated pension and $30,000 in a Colonial First State (CFS) superannuation fund, both "nil entry fee". The latter is invested in the conservative, balanced, diversified property securities and income options with $360 in management fees on the last statement. The ongoing high management fees and uncertainty of the market is a concern. I've been considering taking all the super out and putting it in a bank term deposit, where it's hopefully safer without high fees. R.B.W.

"Nil entry fee" funds were, in fact, a deceptive misnomer and one of the least-attractive inventions of the managed-funds industry. While they eliminated the entry fee, usually about 4 per cent through the 1990s, they replaced them with higher annual and exit fees.

Your ING (OnePath) nil entry fee fund has an additional annual fee of 0.75 per cent but ameliorates it by rebating the full 0.75 per cent after the first four years, in the form of additional units credited to your account. Thus you end up paying an entry fee of about 3 per cent.

The old CFS nil entry fee alternative, which is no longer offered, had an additional annual fee of 0.44 per cent.

Nil entry fee funds, when structured in this manner, are usually not good long-term investments. You may be better able to preserve against loss of capital in a term deposit but you may find the switch will affect any disability pension you receive, so you need to check this aspect before doing anything. Also, check to see if the move will result in a higher tax liability.

You may be better off just rolling the money over into a single fund offering a fixed interest rate. One of the highest such funds is the Defence Bank Retirement Savings Account, offering a term-deposit structure and currently offering 5.35 per cent for six months and 5 per cent for 12 months.

If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW, 2026. Helplines: Financial Ombudsman, 1300 780 808 pensions, 13 23 00.

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Frequently Asked Questions about this Article…

What does “nil entry fee” mean for managed funds and why is it sometimes misleading?

“Nil entry fee” means you aren’t charged an upfront entry commission, but the article explains it can be misleading because many funds replace that upfront cost with higher ongoing annual fees or exit fees. In practice this can shift the cost into the product rather than removing it, so the label “nil entry fee” doesn’t always mean lower overall costs.

How can a “nil entry fee” super or managed fund still end up costing me money?

The article gives examples: some nil-entry products add an extra annual fee (for example 0.75% in the ING/OnePath product) that is rebated over time as additional units, which effectively creates an entry-style charge (about a 3% equivalent in that case). Another example mentioned a CFS alternative that had a 0.44% additional annual fee. These extra ongoing charges and possible exit fees are how costs can still be higher.

Are nil entry fee funds good long-term investments for everyday investors?

According to the article, nil entry fee funds structured to replace entry fees with higher annual or exit charges are usually not good long-term investments. That fee structure tends to make them less attractive over time compared with simpler lower-fee alternatives.

Would moving my superannuation into a bank term deposit be a safer way to preserve capital?

The article suggests that a term deposit can better preserve capital against market loss and may have lower visible fees, but it warns you must check whether changing your superannuation into a term deposit would affect any disability pension you receive or increase your tax liability before making the switch.

What practical checks should a disabled retiree make before switching super to a term deposit?

The article recommends confirming whether the switch will affect any disability pension payments and checking if the move will result in a higher tax liability. It’s important to verify those outcomes before withdrawing or rolling super into a different product.

What alternative did the article suggest instead of cashing out super into a bank account?

The article suggested rolling money into a single fund that offers a fixed interest or term-deposit structure. As an example, it named the Defence Bank Retirement Savings Account, which at the time was offering 5.35% for six months and 5% for 12 months as a term-deposit style option.

How can I spot management fees on my super or managed fund statement?

Look for explicit management fees shown on statements (the article cites a $360 management fee on one recent statement) and for additional annual percentage fees or exit fees. Check the product disclosure for any extra annual charges (for example 0.75% or 0.44% examples in the article) and whether any rebates are credited as additional units rather than cash.

Where can I get more help or ask questions about my superannuation and pensions?

The article provides contact options: you can send questions for George Cochrane to Personal Investment, PO Box 3001, Tamarama NSW 2026. For official helplines it lists the Financial Ombudsman at 1300 780 808 and a pensions helpline at 13 23 00.