Ask the expert: How to handle your superannuation during the coronavirus
Australia’s nearly $3 trillion retirement savings pool has been caught in the coronavirus maelstrom, scaring super members into jumping ship.
But the chopping waters will pass, and members should be focused on weathering the storm rather than looking for a financial life raft.
Fortunately, steering your way through this crisis isn’t as difficult as it might first appear, but it will take a little discipline, says Industry Fund Services’ head of technical, research and advice services Craig Sankey.
“People are seeing a lot of volatility and their [super] balances being affected,” he told The New Daily.
“People are thinking about switching to cash or making a withdrawal, but in both those instances they’re locking in the losses they’ve potentially suffered over the past few months.”
Although it sounds counterintuitive, rushing out to make your superannuation more defensive could cost you more than leaving it as it is.
That’s because falls in your super balance reflect falls in the value of the assets in which your fund invests – not tangible money being lost.
Withdrawing money from your fund, or swapping the types of assets in which you invest, requires the fund to sell those assets – and in the current economic climate, no one wants to buy them.
Assets have to be sold for less than they would normally sell for to make that transaction work, Mr Sankey explained, turning a loss of value into a loss of money.
“Your super is an investment like any other investment,” he said.
“So if you sell down when prices are low, you’ve locked in a sale price which is potentially a lot lower than if you let markets recover and prices go back up.”
The best plan then, Mr Sankey said, is to only draw on or change your super if you absolutely must.
Although that might leave some Australians in need of cash, there are ways to fill up your hip pockets without eroding your long-term wealth.
Check your income options and budgeting
Before deciding to withdraw money from your super, or suddenly changing the types of assets you hold, Mr Sankey said you must comprehensively assess your financial position.
The first thing to do is conduct an “income gap analysis”. This is especially important for anyone who finds themselves out of work or with reduced income due to the coronavirus.
To do this, you need to work out exactly how much money you have coming in, and how much you have to spend on essentials like housing and food.
If there’s a gap, Mr Sankey said, the next step is to find ways it can be narrowed.
“That’s where we’d look at income support payments, or other assets you might be able to access,” he said.
The following table outlines who is eligible for these payments.
But they are not the only ways to close the income gap.
“If people are having reductions in their income, they may be eligible for the low-income healthcare card now,” he said.
“For those with children, there are the family tax benefits. If they’ve estimated their income at the start of the year and have since lost jobs or hours, then they could be eligible for higher payments under those benefits.”
Updating your details with Centrelink could lead to a range of alternative support options, Mr Sankey said.
And anyone already on income-tested benefits should soon receive slightly higher payments after government announced changes to the ‘deeming rates’ used to assess hypothetical returns generated by their investments.
It’s also worth redoing your household budget, Mr Sankey said, as government’s social isolation measures mean your expenses will have changed.
“People are spending less on entertainment and less on travel because they have nowhere to go,” he said.
Take only what you need for now
Many Australians won’t have the luxury of waiting until the value of their investments rises again before they need to take money out.
This predominantly applies to retirees relying on their super to provide an income, and some workers not covered by the government’s JobKeeper support payments (including casual workers).
If you’re in this boat and worried about selling your assets at a discounted rate now, don’t panic – there are still strategies to protect your wealth.
The first step is to seek professional help, either from a financial adviser or – if you’re struggling with debt – a financial counsellor.
Corporate regulator ASIC has even relaxed some of the rules around financial advice so super members can ask their tax agents for advice – a service they weren’t previously licensed to provide.
Mr Sankey also suggested taking out only as much money as you need now, and leaving the rest until markets recover and you can get a better price for your assets.
Workers accessing their super early can withdraw up to $10,000 this financial year (until June 30) and another $10,000 between July 1 and September 24.
But they can take out less if they don’t need the full sum.
For retirees, government has halved the minimum annual drawdown rates, as shown by the table below.
Don’t try timing the market
As markets start to recover, it can be tempting to try gaming them to boost your savings by changing your super fund asset allocation.
Mr Sankey said this is a dangerous game to play.
Instead, Mr Sankey said members should invest in something with an appropriate risk profile for their age.
As a general rule of thumb, younger members should invest in more aggressive growth options.
These offer higher returns but are more volatile, so if things go awry your savings will need a bit of time to recover.
For older Australians, it normally makes sense to be more defensive because you’re closer to retirement and won’t have time to recoup a drop in value the way younger Australians do.
The New Daily is owned by Industry Super Holdings