What does the COVID-19 pandemic mean for your superannuation?
If you’ve been watching the news over the past few weeks (and frankly, who hasn’t), you would have heard that the share market has recently experienced the kind of falls historically associated with major financial crashes. Now, you might think this doesn’t affect you – the share market probably seems a world away from your daily life — but chances are you’re one of the 16 million superannuation members with funds invested in shares. So… What does it all mean for you and your retirement outlook?
Why did the share market drop?
On March 16, the All Ordinaries Index (which is a benchmark index that consists of the 500 largest Australian companies listed on the Australian Securities Exchange (ASX)) recorded its biggest daily fall since the 1987 share market crash, falling by 9.5% – or losing $165 billion of its value.
The losses were driven by concerns among investors that the coronavirus pandemic would cause company earnings to free-fall and that countries would go into trillions of dollars of combined debt that would trigger a global recession.
Since then, the market has been what experts describe as ‘volatile,’ meaning that it has gone up and down like a roller coaster. Recent market upticks are attributed to the extraordinary amount of government financial assistance measures and other stimulus that has been pumped into the Australian economy in recent weeks.
Experts predict the market will remain volatile as the pandemic and economic situation continues to evolve.
Will my super be affected by share market changes?
Australia’s super funds are one of the major investors in the Australian share market. The total value of Australian shares owned by Australian super funds was $650 billion, or 37% of the market, at the end of 2018.
These shares are owned by the super funds on behalf of everyday, working Australians, with Australian shares a major feature of most super fund investment options. As a consequence of the market fall, the value of most super accounts has fallen also.
Is this something to worry about? That depends on a number of factors, the biggest of which is the number of years until your retirement.
Do I need to change my super in response to coronavirus?
Experts advise the majority of working Australians that there’s no need to rush to the internet to check their super balance. Speaking to ABC Australia on March 19, SuperRatings CEO Kirby Rappell says that people in their 20s, 30s and 40s have plenty of time left in their working lives to recover from this ‘blip’ in the share market.
Super is a long-term investment and history tells us that share markets generally recover. For example, SuperRatings compared investing in cash term deposits versus superannuation since the Global Financial Crisis (GFC) and found that super offered better returns. They calculated that $100,000 invested in super at the bottom of the GFC in 2008 would be up to about $121,000, whereas the same amount put into cash would be worth just $90,000 today.
Worried about the extent of your exposure? It’s worth noting that the default investment option (if you haven’t nominated a different one) is a balanced portfolio, which means that most people, across all ages, have around only half of their super balance invested in shares.
What if I were planning to retire soon?
For those hoping to retire in the next few years, the situation deserves closer attention. The first step is to understand how your super funds are invested.
People nearing retirement would normally be invested in a more conservative investment option, which means that a smaller amount of their super would be exposed to the share market.
If you’re not sure, now is a good time to speak to your super fund about whether you have the best mix of investments for the current conditions.
What about people who are already retired?
For retirees, the Federal Government has announced that it will temporarily reduce minimum super drawdown requirements for account-based pensions and similar products in its COVID-19 economic assistance package.
These requirements will be halved for the current financial year and the 2020-21 financial year, which will reduce the need for retirees to sell investment assets in the currently volatile share market.
A potential negative effect, however, is that this could reduce the amount of money you have to live on. That being said, if you’re receiving the age pension, you’ll be eligible for the two tax-free stimulus payments, totaling $1500, that the Government also announced as part of its COVID-19 stimulus package.
Changes to social security deeming rates have also been announced, which should add around $105 extra per year to age pension payments.
What are my options?
If you’re worried about stock market losses, one option would be to change into an investment option with a lower exposure to shares. This would mean that your super fund would sell your shares at potentially lower prices than you bought them for, and then re-invest your funds elsewhere.
In the investment industry this is referred to as ‘locking in your losses’—something that investors generally try to avoid. This is where talking to your super fund, financial advisor or accountant is paramount to making the right decision.
Another factor to consider is that there are very few other asset classes that super funds invest in that are generating decent returns at the moment. For example, asset classes such as cash (which effectively means your super fund puts your money in to a term deposit) or bonds are paying very low levels of interest due to the fact that interest rates globally are very low. The official interest rate in Australia is 0.25%, just a notch above zero.
Other investments beyond the share market that are common among super funds are unlisted infrastructure or unlisted property. While both of these asset classes can offer higher returns, the risk associated with investing in them is also higher.
Can I access my super as part of the government’s coronavirus measures?
Superannuation is usually off-limits until you reach the official retirement age, or hardship or compassionate grounds justify early access. The Federal Government, however, has announced a scheme to allow some people to access up to $10,000 of their super this financial year, and another $10,000 in the first three months of the 2020-21 financial year, tax-free.
The unemployed and people receiving the following benefits will be eligible: JobSeeker Payment, Youth Allowance, Jobseeker, Parenting Payment, Farm Household Allowance, and Special Benefit. (Lost your job or income due to coronavirus? Follow this checklist.)
People who have been made redundant, had their work hours reduced by 20% or more, and sole traders whose turnover has reduced by 20% or more since January 1 this year will also be eligible. Applications can be made to the Australian Taxation Office (ATO) from mid-April.
While the program will be a huge help to thousands of households, investment experts warn people to consider the long-term consequences of reducing their super balance, especially if they won’t be in a position to top it up later.
Is there any silver lining?
If you want to look for an upside, experts say that share market falls can be positive as they may allow your super fund to buy shares cheaply that will rise in value over time—providing that time is on your side.
Likewise, it’s worth bearing in mind that the share market has had a good run over the past few years, so your super would have risen in value above historical averages over that time.
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