How Super fund returns on track for the first negative year can be a good thing
Superannuation balance down sharply? It’s not all bad news for millions of Australians with opportunities for future growth and tax benefits are opening up.
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Super fund returns are on track for their first negative year in more than a decade, and that’s not necessarily a bad thing.
The financial fallout from COVID-19 smashed superannuation fund returns in February and March before a slight recovery last month, but a typical balanced option is still down more than 4 per cent for 2019-20.
If this is as bad as it gets, we are all fortunate.
During the Global Financial Crisis, balanced super fund options fell 6.4 per cent in 2007-08 and then dropped 12.7 per cent in 2008-09.
Some financial forecasters believe more pain in financial markets is on the way as the economic destruction cased by the virus is yet to be fully felt.
But even if super drops further, there are silver linings for fund members.
Firstly, the regular contributions paid in by our bosses are now buying investments at discount prices.
Aussie shares are down about 25 per cent from their February peak and US shares are down about 15 per cent, so every dollar pumped into super is buying more assets than before.
A typical balanced super fund has at least half of your money invested in sharemarkets.
A golden rule among investors – including billionaire shares guru Warren Buffett – is to buy when everyone else is fearful, and that’s what our super funds are automatically doing with our nest eggs right now.
If you stick with your long-term plan and resist the urge to sell, your super should eventually bounce back.
Another positive is that many fund members now have options to pump in extra cash while unit prices are down.
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More than 1.4 million people have each withdrawn up to $10,000 from their funds as part of the government’s early release scheme to cope with COVID-19.
However, millions more are finding themselves with extra cash to invest.
They have cancelled travel plans and are spending much less on entertainment, dining and experiences right at a time when stuffing more money into super could be a good financial strategy.
The end of financial year is near, and most Australians are able to get a tax deduction for extra money they inject into their fund.
The limit is $25,000 annually and that cap includes employer contributions, but for most workers there’s still a gap of thousands of dollars that can be pumped into super.
That money is taxed at 15 per cent on the way in, but you get the benefit of a tax deduction.
People worried about further heavy falls in financial markets can elect to put those extra contributions in cash until the global turmoil subsides.
Another super incentive is the government co-contribution scheme for low and medium income earners.
It adds $500 if a person puts $1000 of their own after-tax cash into their fund. That’s an effective 50 per cent return.
And the spouse contribution offers an 18 per cent rebate on contributions up to $3000 that are made to a spouse’s super fund if they’re earning less than $40,000 a year.
Originally published as How Super fund returns on track for the first negative year can be a good thing