Grow your super
The sharemarket crash can provide valuable lessons on how to protect and grow our retirement savings
Superannuation is a unique investment vehicle. For many of us, we set and forget. Employers contribute 9.5% of our ordinary wages and we, hopefully, watch the value of the nest egg grow. “There are a lot of people who over time, as they’ve been accumulating, haven’t been focusing on their super,” says Bryan Ashenden, head of financial literacy and advocacy at BT.
But is set and forget the right way to go, especially during the pandemic?
“We shouldn’t forget about it. Once engaged, stay engaged,” says Ashenden.
Early access to super
The outbreak of Covid-19 saw the tax office move to allow people access to $10,000 of their super until June 30, 2020, and a further $10,000 from July 1 until September 24, 2020.
The Association of Superannuation Funds of Australia (ASFA) estimates that as of May 7, super funds had made about 1.2 million individual early payments, totalling $9.4 billion in financial support.
“People need to understand the consequences of accessing their superannuation early,” says Ashenden. “Of course, there are people who need access to that money. If the cost of debt outweighs what they’d make on super, it might be the right move.”
But there are consequences. If you’re withdrawing money at the bottom of financial markets, your account has to work harder to recoup the losses.
“Some of that cost is the forgoing of future investment earnings and for some members the cost may materially impact their income in retirement,” says Shawn Blackmore, group executive member experience and advice at AustralianSuper.
Mark Wilkinson, financial adviser at BDO, shares this view. “While accessing your super right now might provide some relief, if you’re facing significant financial pain, there should be a big, red ‘proceed with caution’ sign warning that your future self will pay the price for this move.
“There have been similar arguments in recent years for accessing super as a way of helping first home buyers get into the market. But the numbers just don’t add up.
“Although $10,000 doesn’t sound like a lot, for a person who is 25 who loses their job due to Covid-19, that $10,000 today could be worth $160,000 when they retire in another 40 years.”
As such, you should understand the difference between the benefit of accessing super now with the drag it will have on your future financial position.
Accessing your super early may also rob you of other benefits.
“People who accessed up to $10,000 out of super may lose their insurance cover, depending on their balance, so they should check what level of insurance they hold,” says Ashenden.
“People who withdraw should check that they still have a big enough balance to keep paying insurance. You don’t want a situation where the fund doesn’t have the money to keep paying those insurance premiums.”
If you’re unsure about whether you can or should access superannuation early, it’s always a good idea to seek professional advice.
“If people do believe that they need to access their super, I suggest they get independent advice so they make sure they understand the consequences,” says Ashenden.
Widespread early access to super also threatens the capacity of funds to manage their assets in the usual way.
According to the McKell Institute, some funds may have to sell assets – at the bottom of the market – to allow for this unexpected access. Those funds “with sufficient liquidity to cover the cash call won’t be able to use these reserves to purchase under-priced assets that would assist in their recovery”.
Time to reassess risk
Uncertainty surrounding the coronavirus has led to a bear market, with investors shifting their portfolios from growth to defensive assets.
Dominique Bergel-Grant, a financial planner and director at Leapfrog Financial, says investors should consider how much risk they’re willing to have in the sharemarket and what level of volatility they are prepared to accept.
“It is the perfect reminder that not all investments carry the same level [of volatility] and to really test to see if you are the type of investor who will panic and move to cash, or be the type of investor who sees the current Covid-19 crisis and corresponding sharemarket volatility as an opportunity.”
Of course, selling when the market has already hit the bottom could result in missing gains from more growth-oriented investments when it recovers. On the other hand, if there are further market drops, switching to defensive assets could help contain further losses.
“Switching to cash after a bad patch is not the best strategy for maximising retirement savings and wealth over time as it locks in the loss with no hope of recovery,” says AMP Capital chief economist Shane Oliver.
“The best approach is to simply recognise that super and investing in shares is a long-term investment. The exceptions to this are if you are really into putting in the effort to getting short-term trading right and/or you are close to, or in, retirement.”
Contribute and get ahead
As we approach June 30, it’s good to know whether you can capitalise on tax incentives through voluntary super contributions. There are two different ways to do this.
The first is through a non-concessional (after-tax)
Super and investing in shares is a long-term investment
contribution. Here you can add up to $100,000 each year. This can be done without a working test if you’re under 65. Those over 65 can still do it, but they have to satisfy a working test.
Moreover, until you turn 65, you can bring forward up to two years of contributions, so make up to $300,000 in contributions.
The second way is through a pre-tax contribution, which is tax deductible. This can be up to a value of $25,000, and includes anything your employer has contributed over and above the base contribution, such as through salary sacrifice. If you’ve salary sacrificed $10,000, for example, then you’re able to make another $15,000 in pre-tax contributions.
What should SMSFs do?
For all self-managed super fund (SMSF) trustees, this is the time to assess the viability of your fund, not just in the short term but to question the long-term needs of your members and the risks you take, says Dominique Bergel-Grant.
Generally SMSFs incur higher fees than those experienced by regular super funds. Whereas public super funds charge members a percentage fee of the total funds under management, SMSFs typically charge flat advice and service fees. This can make them less cost-competitive when fewer funds are managed.
“If you are only holding shares, cash and managed funds, really question if it is worth continuing to incur the audit, accounting and other compliance costs when such lowcost non-SMSF options are available,” says Bergel-Grant. “Remember the theme here is to cut unnecessary spending.” Property held by the SMSF can also pose challenges. “Have you got enough liquidity if your tenant cannot afford to pay the rent?” she says. “What if your tenant leaves, and you are left with an empty property for not just a few months but maybe a year or more?”
On the other hand, SMSFs may be better situated to weather the current volatility.
Research from Rainmaker Information, publishers of Money magazine, found that a quarter of the SMSF sector’s exposure is to cash and 45% to shares. In contrast, other super funds hold on average 10% in cash and 60% in shares.
“This heavy exposure to low-risk assets like cash may
Heavy exposure to low-risk assets like cash may prove to be fruitful in the Covid-19 climate
prove to be fruitful in the current Covid-19 climate as they may be better protected than the average not-for-profit and retail fund,” says Alex Dunnin, executive director of research at Rainmaker Information. What should retirees do?
Roger Cohen, senior investment specialist at BetaShares, says people on the cusp of retirement and those in retirement should keep their superannuation invested despite the wild volatility triggered by the Covid-19 pandemic.
Cohen acknowledges that riding out market swings will test the mettle of even the most seasoned investors. He also notes that many retirees and pre-retirees set up SMSFs as a reaction to the GFC.
“Many SMSFs were not well governed or advised. Coming out of the GFC, they had large allocations to cash and therefore missed out on the recovery in equities,” says Cohen.
He believes retirees, particularly those who sell out of the market irrationally, will not fully benefit from the recovery that will eventually take place, and any changes to the construction of portfolios as a reaction to the current situation will also have lasting consequences.
“A panic reaction will cause many to sell at the bottom or on a bounce. They will not benefit from a subsequent recovery. While others may rebalance their portfolios (which generally sees reweighting into growth assets) too soon or too late,” he says.
“This is where rational and irrational behaviours can have a significant impact on the financial wellbeing of retirees.
“The decisions they make during this unprecedented event could make or break their retirement plans. It may leave some effectively ‘retirement trapped’ by their irrational decision-making.”