Superannuation funds stage partial recovery as market confidence improves

Superannuation funds stage partial recovery as market confidence improves

Median growth superannuation funds rebounded by 3.1 per cent in April, after taking a major hit in previous months due to COVID-19, according to Chant West data.

The median growth super fund lost about 12 per cent in February and March as investors rushed to sell their shares in response to fears around the coronavirus.

While retirement savings have seen a slight bounce-back in April, returns for the 2019-20 financial year to date were still in negative territory at -3.3 per cent.

Chant West senior investment research manager Mano Mohankumar attributed the April rebound to recovering investor confidence.

“April saw share markets rebound as investors grew more optimistic around coronavirus curves flattening around the world, the expectations of lockdowns easing and economies starting to reopen, partially at least,” he said.

Mr Mohankumar warned against being too hopeful too soon, noting that the world was heading towards a global recession.

“While this provided some relief after the pounding markets took in the previous two months, it’s still far too early to tell what the full impact of COVID-19 will be on individual companies, industries and the global economy,” he said.

“Regardless of the pace of any recovery, we should expect heightened volatility to continue as investors react sharply to news – good or bad.”

Losses nowhere as bad as the GFC

Alex Dunnin, executive director of research at Rainmaker Information, said super returns during the global financial crisis were much worse than what is seen today. 

“Super fund members worried about their investment returns should take solace that during the global financial crisis in 2008-09 returns got as low as -21 per cent at one point,” he said.

“Results so far during the corona financial crisis (CFC) are nowhere near as deep.”

The Australian Securities Exchange has seen significant volatility late February, when the coronavirus began impacting financial markets. Despite a relatively strong recovery, the ASX has still seen a decline of 22 per cent since the start of the CFC.

“At face value super funds have fallen less than half as much as the ASX,” said Mr Dunnin.

“While this is a scary story for super fund members, it’s also a good story because it shows how their fund’s investment strategies have insulated them from the worst of the share market falls."

Super fund holders should think long-term

Mr Mohankumar said many people have already locked in their losses by switching to another less risky super option.

“If you take panic action after share markets have already fallen, you only convert paper losses into real ones,” he said.

“Not only that, you also risk missing out when markets rebound as they will at some point.”

Given that markets generally bounce back faster than economies, Mr Mohankumar added that anyone with a super fund should have a long-term mindset.

“The best strategy is almost always to remain patient and ride out the volatility.”

Not everyone has heeded that advice to wait out the tough times.

Nearly 1.2 million Australians have cashed out their super funds, Australian Prudential Regulation Authority numbers show, after the federal government allowed workers affected by the pandemic to access their retirement savings. The scheme was designed to help combat the impacts of the economic downturn.

About $9 billion worth of payments have been handed out since the beginning of the scheme on April 20. The average payment amount is $7,546.

Traditional diversified super fund performance (results to April 30, 2020)

Risk category Exposure to growth assets (%) Past 1 month (%) Past 3 months (%) Past 1 year (%) Past 5 years (%)
All growth 96 - 100 5.7 -12.9 -3.7 5.7
High growth 81 - 95 3.9 -11.1 -2.8 5.6
Growth 61 – 80 3.1 -9.3 -1.8 5.3
Balanced 41 – 60 2.3 -6.8 -0.9 4.1
Conservative 21 - 40 1.4 -4.3 0.7 3.8

Note: Performance is shown net of investment fees and tax. It is before administration fees and adviser commissions.

Source: Chant West.

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Learn more about superannuation

How much is superannuation in Australia?

Superannuation in Australia is currently 9.5 per cent – which means that your employer must pay you superannuation equivalent to 9.5 per cent of your salary.

The ‘superannuation guarantee’, as it is known, has been at 9.5 per cent since the 2014-15 financial year. It is scheduled to rise to 10.0 per cent in 2021-22, 10.5 per cent in 2022-23, 11.0 per cent in 2023-24, 11.5 per cent in 2024-25 and 12.0 per cent in 2025-26.

How does superannuation work?

Superannuation is paid by employers to employees, at least once every three months. The ‘superannuation guarantee’ is currently 9.5 per cent – which means that your employer must pay you superannuation equivalent to 9.5 per cent of your salary. The guarantee is scheduled to rise to 10.0 per cent in 2021-22, 10.5 per cent in 2022-23, 11.0 per cent in 2023-24, 11.5 per cent in 2024-25 and 12.0 per cent in 2025-26.

Superannuation is generally taxed at 15 per cent. However, if you earn less than $37,000, you will be automatically reimbursed up to $500 of the tax you paid. Also, if your income plus concessional superannuation contributions exceed $250,000, you will also be charged Division 293 tax. This is an extra 15 per cent tax on your concessional contributions or the amount above $250,000 – whichever is lesser.

You can withdraw your superannuation when you meet the ‘conditions of release’. The conditions of release say you can claim your super when you reach:

  • Age 65
  • Your ‘preservation age’ and retire
  • Your preservation age and begin a ‘transition to retirement’ while still working

 

Can I take money out of my superannuation fund?

Superannuation is designed to provide Australians with money in their retirement. The government has strict rules around when people can take that money out of their fund because it wants to prevent people eroding their savings before they reach retirement.

As a general rule, you can only take money out of your superannuation fund when you reach:

  • Age 65
  • Your ‘preservation age’ and retire
  • Your preservation age and begin a ‘transition to retirement’ while still working

That said, you can take money out of your superannuation fund early based on one of these seven special conditions:

  • Compassionate grounds
  • Severe financial hardship
  • Temporary incapacity
  • Permanent incapacity
  • Superannuation inheritance
  • Superannuation balance under $200
  • Temporary resident departing Australia

What is a superannuation fund?

A superannuation fund is an institution that is legally allowed to hold and invest your superannuation. There are more than 200 different superannuation funds in Australia. They come in five different types:

  • Retail funds
  • Industry funds
  • Public sector funds
  • Corporate funds
  • Self-managed super funds

Retail funds are usually run by banks or investment companies.

Industry funds were originally designed for workers from a particular industry, but are now open to anyone.

Public sector funds were originally designed for people working for federal or state government departments. Most are still reserved for government employees.

Corporate funds are arranged by employers for their employees.

Self-managed super funds are private superannuation funds that allow people to directly invest their money.

How do you calculate superannuation?

Superannuation is calculated at the rate of 9.5 per cent of your gross salary and wages. So if you had a salary of $50,000, your superannuation would be 9.5 per cent of that, or $4,750. This would be paid on top of your salary.

The ‘superannuation guarantee’, as it is known, has been at 9.5 per cent since the 2014-15 financial year. It is scheduled to rise to 10.0 per cent in 2021-22, 10.5 per cent in 2022-23, 11.0 per cent in 2023-24, 11.5 per cent in 2024-25 and 12.0 per cent in 2025-26.

How do you set up superannuation?

Before you set up a superannuation account, you’ll need to check if you’re allowed to choose your own fund. Most Australians can, but this option doesn’t apply to some workers who are covered by industrial agreements or who are members of defined benefits funds.

Assuming you are able to choose your own fund, the next step should be research, because there are more than 200 different superannuation funds in Australia.

Once you’ve decided on your preferred superannuation fund, head to that provider’s website, where you should be able to fill in an online application or download the appropriate forms. You’ll need your tax file number (assuming you don’t want to be charged a higher tax rate), your contact details and your employer’s details (if you’re employed).

When did superannuation start?

Australia’s modern superannuation system – in which employers make compulsory contributions to their employees – started in 1992. However, before that, there were various restricted superannuation schemes applying to certain employees in certain industries. The very first superannuation scheme was introduced in the 19th century.

Is superannuation paid on overtime?

As the Australian Taxation Office explains, there are times when superannuation is paid on overtime and times when it isn’t.

Here is the ATO’s summary:

Payment type Is superannuation paid?
Overtime hours – award stipulates ordinary hours to be worked and employee works additional hours for which they are paid overtime rates No
Overtime hours – agreement prevails over award No
Agreement supplanting award removes distinction between ordinary hours and other hours Yes – all hours worked
No ordinary hours of work stipulated Yes – all hours worked
Casual employee: shift loadings Yes
Casual employee: overtime payments No
Casual employee whose hours are paid at overtime rates due to a ‘bandwidth’ clause No
Piece-rates – no ordinary hours of work stipulated Yes
Overtime component of earnings based on hourly-driving-rate method stipulated in award No

What are the age pension's age rules?

Australians must be aged at least 65 years and 6 months to access the age pension. This eligibility age is scheduled to increase according to the following schedule:

Date Eligibility age
1 July 2019 66 years
1 July 2021 66 years and 6 months
1 July 2023 67 years

How do I change my superannuation fund?

Changing superannuation funds is a common and straightforward process. You can do it through your MyGov account or by filling out a rollover form and sending it to your new fund. You’ll also have to provide proof of identity.

What are the risks and challenges of an SMSF?

  • SMSFs have high set-up and running costs
  • They come with complicated compliance obligations
  • It takes a lot of time to research investment options
  • It can be difficult to make such big financial decisions

What is MySuper?

MySuper accounts are basic, low-fee accounts. If you don’t nominate a superannuation fund, your employer must choose one for you that offers a MySuper account.

MySuper accounts offer two investment options:

  1. Single diversified investment strategy

Your fund assigns you a risk strategy and investment profile, which remain unchanged throughout your working life.

  1. Lifecycle investment strategy

Your fund assigns you an investment strategy based on your age, and then changes it as you get older. Younger workers are given strategies that emphasise growth assets

What will the superannuation fund do with my money?

Your money will be invested in an investment option of your choosing.

What happens to my superannuation when I change jobs?

You can keep your superannuation fund for as long as you like, so nothing happens when you change jobs. Please note that some superannuation funds have special features for people who work with certain employers, so these features may no longer be available if you change jobs.