Many Australians are wondering what to do with their super at the moment with the economic impacts of COVID-19. Share markets are volatile and many super balances are dropping accordingly. This raises some important questions:
- should you change your current investment mix in your super fund?
- should you switch to another super fund?
- should you consolidate your super accounts?
- should you consider the federal government’s COVID-19 early release of super scheme if you’re eligible?
Should I change my investment mix in my super fund?
This depends on a range of factors including your age and how far away you are from retirement. Although your super balance may have dropped since the COVID-19 pandemic hit our economy, if you are young, it is likely that you will have plenty of time for the balance to recover.
However, if you are nearing retirement or you are already retired, you should regularly review the investment mix in your super fund.
There are three broad asset types that super funds invest in:
- fixed interest/cash investments,
- property, and
It is important to understand that these different types of investments have different levels of risk and return. In general, the higher the potential return, the higher the risk, and vice versa.
Both property and shares tend to outperform fixed interest/cash investments over the medium to long-term. However, both property and shares can also drop in value, unlike fixed interest/cash investments.
Most super funds offer a range of investment options that include:
- balanced, and
Conservative portfolios invest in low-risk assets like fixed interest/cash. These investments are low risk, but they also provide low returns. Interest rates in Australia are currently at record lows. However, a conservative portfolio can be a good option if you are nearing retirement or are currently retired and you need income certainty.
Balanced investment portfolios have a mix of asset types. This diversification is a fundamental investment risk management principle. The lower-risk assets balance out the higher-risk assets and vice versa. For example, if the share market is falling but property prices are rising, you will be less exposed to the fluctuations of both markets.
A balanced portfolio is the default option for most super funds. This means that if you don’t nominate an investment portfolio, your funds will be invested in the fund’s balanced portfolio.
Growth portfolios invest in higher-risk assets with higher potential rates of return (for example, speculative shares). They are usually more suitable for younger investors who have time on their side to ride out any market downturns like we are experiencing right now.
If you are considering switching investment portfolios within your super fund, you should:
- get independent, professional advice to make sure the switch is appropriate for your needs,
- consider any fees that you may be charged, and
- consider any potential tax implications.
Should I switch to another super fund?
Switching to another super fund is another option that many Australians are considering with their super balances dropping. If you are, it is important to consider a range of factors, including:
- their long-term rate of return,
- the fees they charge,
- their investment portfolio options,
- the potential tax implications, and
- the level of insurance cover they provide (and whether you will be eligible for cover).
Again, it is worthwhile to get independent, professional advice BEFORE you make the decision on whether to switch super funds or not.
Should I consolidate my super accounts?
If you have had multiple jobs over the years, it’s likely that you will have multiple super accounts if you haven’t already consolidated them by ‘rolling over’ your balances into your current super fund.
The problem with having multiple super accounts is that you will be unnecessarily paying multiple fees to different super fund providers. These fees will erode the amount of super you will have available to you in retirement. You should rollover your funds into a single super account instead.
If you’re unsure how many super accounts you have, you can check via your myGov account, provided it is linked to the Australian Taxation Office.
Should I access the COVID-19 early release of super scheme?
One of the federal government’s economic responses to COVID-19 has been to allow eligible Australians to withdraw their super early and tax-free in two separate instalments of up to $10,000 each. More than 2 million Australians have already done this.
Under normal circumstances, you cannot access your super until you:
- reach your preservation age (which is between the ages of 55 and 60, depending on your date of birth), and
- satisfy a condition of release (such as retiring from the workforce or turning 65).
Whether you should withdraw your super early depends on whether you are genuinely suffering financial hardship. It is important to understand that any funds that you withdraw now will not be available for you in retirement.
You will also lose the opportunity for those funds to grow over time in your super fund. The potential loss of earnings can be significant. For example, if you are aged 35 and you withdraw $20,000, you will potentially lose $34,000 in super fund earnings if your fund averages a 5% return over the next 20 years.[i]
Eligible Australians who want to access their super early under the COVID-19 early release scheme have until September 24 this year to do so. Once again, it is worthwhile to seek independent, professional financial advice on the pros and cons of doing so before you apply.
How we can help
We will take the time to understand your individual circumstances and financial goals before providing you with the right advice. It is important to make the right decisions to secure your long-term financial future.
We can also help you to set up a self-managed super fund (SMSF) if that’s something you would like to do and it is appropriate for your situation.
Contact us today for a complimentary, obligation-free consultation to find out how we can help you!