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What Are The Risks Of Switching Your Super Fund?
With Australia in the grip of a cost-of-living crisis, many Aussies are considering switching their super funds.
Those expecting bigger returns sooner should know that switching super can be risky – and can set you back years on your savings plan.
Superannuation is the heart of Australian retirement savings. Most Australians will go through their working life with super on autopilot. The truth is, super is a complex system fraught with potential pitfalls for the uninformed and unprepared.
Why switching your super fund may not always be in your best interest: The basics
One of the key risks associated with switching super funds is the potential loss of insurance coverage. Many Australians are not aware that their superannuation includes insurance for life, disability, and income protection. Switching funds may result in the cancellation of these policies, potentially leaving families unprotected in the event of an unforeseen circumstance.
Another risk is the impact on your investment. Switching super funds can lead to a change in your investment strategy. Different funds have different investment portfolios and risk profiles. If the new fund doesn't align with your financial goals and risk tolerance, it could have a detrimental impact on your retirement savings.
You might also have to pay exit fees. While the government has capped exit fees at $300, this is still a significant amount that could eat into your retirement savings.
Lastly, you could also lose track of your super. According to the Australian Taxation Office, there are billions of dollars in lost super. Switching funds frequently increases the likelihood of losing track of your super, leading to potentially significant losses.
The risks in a bit more detail
Cancelled insurances: Closing a super account fully might result in the cancellation of insurances within the account. While this will eliminate premium costs, it might also leave you under-insured. Obtaining replacement cover can be challenging or pricier, especially if you've had health issues.
Lower investment returns: Don't be swayed by a super fund's impressive performance in one year. Past performance doesn't guarantee future results. Ensure you're comparing similar investment options and research other options within your current fund that may be better performing or more suitable for your needs.
Time out of the market: The process of changing super funds can take between 1 and 4 weeks (sometimes longer). During this time, your balance won't be invested and won't earn a return.
Transaction costs and CGT: Switching super funds may require selling investments in your current fund and buying in your new fund. This can lead to transaction costs, such as brokerage and buy/sell spreads, as well as Capital Gains Tax (CGT) – both of which will reduce your balance during the process.
Lost contributions: When switching super funds, make sure to notify your employer of your new super fund details to avoid having your contributions go to your old fund or returned to your employer.
So, why would you switch?
While these risks are substantial, there may still be valid reasons for switching your super fund. If your current fund is consistently underperforming or has high fees, it might be worth considering a switch. However, it's crucial to remember super – like investment – is a long game. So do your research and consider the potential risks before making a decision.
Expert tip: The Australian Securities and Investments Commission (ASIC) recommends comparing at least two different super funds before making a switch. Consider factors such as fees, performance, insurance coverage, and the type of investment options available.
Also consider seeking financial advice. A financial advisor can provide personalised advice based on your individual circumstances and help you navigate the complexities of superannuation.
The Bottom Line
Switching your super fund is a significant decision that should not be taken lightly. It's important to weigh the potential benefits against the risks and seek professional advice if necessary. What may seem like a short-term fix may not end up being the best decision for your retirement savings.
While the superannuation landscape can be complex, it's crucial for Australian families to understand the potential risks associated with switching super funds. By being informed, you can safeguard your future and ensure a secure retirement.
Financial disclaimer
The information contained on this web page is of general nature only and has been prepared without taking into consideration your objectives, needs and financial situation. You should check with a financial professional before making any decisions. Any opinions expressed within an article are those of the author and do not specifically reflect the views of Compare Club Australia Pty Ltd.
