Spotlight on super: Why dipping in early might not be the smartest move

early access to super money

The coronavirus hasn’t been kind to our super fund investments lately, to put it mildly.

The providers justify it with obfuscating terms like market volatility, but we called it something a lot less dignified, let me tell you when we downloaded our latest statement.

In our recent Facebook poll, almost a third of you told us that you’d be taking advantage of the Government’s new policy allowing access of up to $10,000 of your super balance in this financial year, and another $10,000 in the next.

That money will no doubt be a Godsend for many who have had their lives turned upside down by COVID-19, but experts are telling us to to be cautious with this approach.

If you can get through this slump by other means, they say, take it because you’ll be a lot better off in the long-term.

To find out why – and for a little reassurance that our super money is really working best for us – we fired off some questions to Sarah Forman, Group Executive Advice, at First Super National.

Please explain how much $20,000 is going to cost us when we retire in 20 or so years from now, and why.

We understand that for many Australians in financial distress, taking advantage of the Government’s changes to early access to superannuation will assist them to meet their day-to-day living expenses. We are ready to support those members to receive the money they need as soon as possible.

Generally, we believe early access to superannuation should be a last resort, particularly because of the impact it can have on a member’s long-term financial outcome.

Between its high on 20 February and 23 March, the ASX 200 dropped more than 36%, significantly reducing superannuation savings across the country (although the market has rebounded some way to mid-April, we are cautious in assuming this will be a sustained sharemarket recovery). Accessing up to $20,000 of their superannuation over the next few months means members will crystallise that immediate loss.

It also means they will miss out on the opportunity to earn investment earnings on these funds and the benefit of compounding savings overtime. Our modelling shows that members who withdraw $20,000 from their super now, could be up to $90,000 worse off in retirement depending on their age. For example, our modelling shows that a 45-year-old member with an average balance of $92,000, who accesses $20,000 of their superannuation now, will be at least $43,000 worse off in their retirement. This is a significant amount of money and they will potentially need to rely more on the Age Pension in future.

Early access to superannuation is one option available to members in financial distress, but there are other avenues of support as well and it is so important that members seek advice and assistance to help them to get the help they need when they need it.

It is never too late to get advice. Part of getting through today’s challenges might mean making a small adjustment rather than a wholesale change, while accessing the different types of assistance offered by government and the broader community.

If our readers do choose to not break into their super and go with your advice on this, how do they know their super is working best for them?

Many superannuation members may have seen some losses to their superannuation balances due to the current market volatility. But it is important to remember that superannuation is a long-term investment. While current conditions are challenging, we expect this will improve in the medium to long term. We would encourage members to maintain their long-term investment strategy if they can.

Super funds like First State Super have diverse investment strategies to try to cushion the impact of market downturns such as we have seen over the past couple of months.

While the markets have fallen more than 30% at the bottom, our Balanced Growth and Growth investment options are down between 9 %and 12% over the past month. However, for the 12-month period our Balanced Growth performance is actually positive, and our Growth option has lost less than %. When you consider five-year and 10-year returns these are also positive.

This illustrates why it is important to consider superannuation as a long-term investment.

We saw the impact of changing one’s investment strategy during the GFC, when a number of Australians switched to more conservative options such as cash. The problem with this approach, is switching to cash requires you to make two great decisions – knowing the right time to switch to cash and knowing the right time to switch back again. Very rarely do investors get this timing right, and if they don’t it can have a significant impact on their retirement outcome.

We have modelled an average member in their mid-50s who switched to cash during the GFC and did not switch back, which is very common. That member has been working and contributing to their super since their early 20s. Now as they are preparing to retire, they have foregone upwards of $130,000 in retirement savings as a consequence of that decision to go to cash.

Even if this member was to reinvest at retirement, switching to a Balanced option, that lost decade translates to a 10% reduction in their potential income during their retirement years.

For this reason, we would strongly encourage any members thinking about changing their investment options to seek some advice. Funds like First State Super offer general and intra-fund advice over the phone and at no cost.

We are here to support and assist our members during this challenging time and help them to prepare for their long-term retirement outcome.

What questions should they be asking of their funds to ensure the best returns?

It is critical that members speak to their fund to make sure that they are in the right investment option for them. For example, generally members who are still working and are a number of years away from retirement may consider a more aggressive investment approach to help drive higher returns, although there is greater risk during downturns such we are experiencing now. These members have time to re-coup these losses when the markets rebound as we know they will.

For members closer to retirement age, they may consider a different, more conservative investment mix.

It is also important to consider the long-term investment performance of your superannuation fund as super is a long-term investment.

We believe all Australians should have access to trusted, quality affordable financial advice to help them to achieve the best possible retirement outcome. We see every day how the right advice at the right time, really does change our members lives. So, if a member is concerned or would like to know more about their investment options, we would encourage them to contact their fund and seek some trusted advice.

Is there a formula we can adopt to give us peace of mind on knowing we have the best investments?

There is no set formula, but most Australians are in a default MySuper superannuation option. This has been established by super funds to provide their members with a diverse investment option relevant to their age.

As the Vanguard’s How Australia Saves report highlighted, the majority of Australian super members are in lifecycle products. These products have a diversified investment strategy with built-in incremental changes to a more conservative asset allocation each year after members reach the age of 55. This strategy is designed to support members to achieve the best possible retirement outcome, focusing on growth assets in younger years and moving into a more conservative approach as members get closer to retirement.

Members of course have the option to choose their own investment strategy – either self-directed where they choose their own investment mix or a target risk strategy with a single diversified option.

We would encourage any members considering changing their investment option to seek advice from their super fund or someone they know and trust to ensure that this change will assist them to achieve the kind of retirement they deserve.

How much is a reasonable amount to pay in fees? Are they regulated so we can check that we’re not getting ripped off?

There are a number of different elements that make up superannuation fees including the administration fees that support day-to-day operation of the fund and investment fees. Also, most members also are entitled to Total Permanent Disability insurance within their superannuation.

If members look on their statements, they can see the amount of fees they have paid during the year. In general terms, combined fees should be under 1.5%. Lower fees are important – but so are returns and members need to review both fees and returns.

Profit-for-member funds like First State Super return profits to our members as returns and do not return profits to shareholders, so our focus is on providing our members the best possible service and support at the lowest possible cost.

First State Super is working to leverage the benefits of our size and scale to help drive down our costs to members. This is one of the reasons we are currently finalising a merger with VicSuper. Once this merger is complete, we will have more than 1.1 million members and $125 billion in funds under management.

We expect to leverage our size and scale to not only access a more diverse range of investment options to deliver strong, sustainable long-term returns for our members, but also drive economies of scale to reduce fees for members over time.

Recently we were able to reduce the fees for our members in our retirement products between 10% and 40%, providing these members which much needed savings right when they need it most. In addition, late last year we put a cap of $750 on administration fees for people who are still saving in the accumulation phase.

So, when considering the fees a fund may charge, it is important to consider the overall products and services available to you and the support you need to help you achieve the kind of retirement you want.

We would strongly encourage you to talk to your super fund or a trusted adviser to better understand the fees and services you are being offered and consider if the product is right for you.

In this current economic climate, am I best to have a SMSF?

Self-managed super (SMSF) funds play an important part in the Australian superannuation sector. While there are benefits for some members in being in an SMSF, for the majority of super members SMSFs may not provide them with the support they need and may prove to be very expensive and time consuming to run.

The benefits of being in a large fund are numerous even in the current economic climate. Funds like First State Super have more than 70 experts in our Investment Team working to not only cushion the impact to our members of the current economic downturn but preparing to take advantage of the long-term opportunities that will return to the market in the medium to long-term. Larger super funds also have access to a much more diverse investment pool which helps to deliver strong, sustainable, long-term returns to our members.

Funds are also able to leverage the benefits of size and scale to provide additional services and support to our members such as TPD and income protection insurance and most importantly financial advice services.

First State Super members have access to general and intra-fund advice at no cost. We also provide comprehensive and specialist advice support including aged care and estate planning services to help our members and their families to prepare for their long-term future.

Before choosing to set up a SMSF or join a super fund it is important to see an adviser and understand the risks and opportunities available to you.

Is it easy to move providers if you’re not happy with the one you have? Are there penalties to be concerned about?

It is easy to change super funds; you can usually do this online and funds are not able to charge exit fees should you choose to switch.

But before you do so, you should make sure you read the relevant Product Disclosure Statements and understand the fees and other services that the super fund provides.

It is also important that if you have more than one super fund, you consider consolidating your accounts. This is easy to do online and can help reduce the fees that you are paying on multiple accounts.

Any other messages you’d like to share that you feel relevant to us?

Many Australians are understandably feeling anxious at the moment with the current market volatility and economic uncertainty.

In this environment we all need to come together and support each other to respond to this crisis.

It is important to remember though that superannuation is a long-term investment and the markets will rebound in the medium to long term, just like they did after the GFC and the 1987 stock market crash before then.

If you are thinking about changing investment options or funds, seek some advice from someone you know and trust.

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