Superannuation tips for switching to a new fund to boost returns

Superannuation fund annual returns are trickling in and many members are happy. If you’re not, should you be switching?

Superannuation funds have been busy announcing impressive investment returns for members following a strong financial year, although their leaderboard has some large variations.

Research group SuperRatings examines funds’ returns and says the median balanced option is expected to deliver members an estimated 8.8 per cent return for 2023-24.

Some funds were quick to announce bigger gains: Australian Retirement Trust achieved 9.9 per cent for its balanced option, Colonial First State’s balanced fund returned 12.1 per cent, and Vanguard’s MySuper opption delivered 13.2 per cent.

Others were slightly below the projected median, with AustralianSuper’s balanced investment option at 8.5 per cent and Rest returning 8.7 per cent.

Several funds will be further below the midpoint of overall returns, but super specialists say people should never switch based on a single year’s performance.

Hundreds of thousands of new member accounts are opened, closed and switched every year, according to superannuation regulator APRA.

Super Members Council executive general manager strategy Matt Linden said an average $10bn annually had been switched to industry funds, mostly from retail funds, over the past seven years.

“This net movement was initially driven by the Royal Commission, which put a spotlight on fund performance,” Mr Linden said.

“Switching activity has tapered since then.”

Time for a check-up

Mr Linden said super remained a “set and forget proposition” for many people, but even small differences in performance added up in the long term.

“A 1 per cent difference in investment returns over a full working life for someone on the median age-based wage can mean $107,400 less in superannuation.

“The end of each financial year is a great time to check your fund’s performance – look out for your annual super statement soon.

“When comparing funds, always compare long-term performance – ideally more than 10 years – and compare net return on investments. That is investment returns minus investment and administration fees. That’s the only way to make a true comparison.”

Aware Super chief of staff Katrina McPhee said in the past there was a lot of switching when people moved from one job to the next, by the government’s stapling reforms a few years ago meant people could carry their super accounts between jobs.

“When people switch now, it’s mostly because they’ve received advice or they’re taking an active interest in their super,” she said.

“This is really heartening, and indeed, I’d stress the importance of taking a strong interest in your super. I’d like to think that over time we’ll see a pick-up in switching activity as more and more people really drill down into the returns and service they’re getting.”

Ms McPhee said anyone with a super fund that was under-performing over the long term should “give serious consideration to switching”.

“When it comes to comparing funds, ratings agencies like Chant West and SuperRatings do a lot of the work for you through their awards programs, so factor them in as you do your homework,” she said.

Don’t let unnecessary fees eat into your life savings. Picture: iStock

How to switch

The idea of piles of paperwork and uncertainty may scare many people off switching, but technology has made it much simpler.

“In the digital era, switching funds is generally a seamless experience,” Ms McPhee said. “Most funds will let you join and open an account online in minutes. You’ll then need to give your employer details of your new fund for your super payments. Many funds help you through this process by contacting your employer on your behalf, or providing pre-filled paperwork to pass on to your employer.”

Consolidating multiple superannuation accounts into one fund was also easier to manage and could save people money by resulting in just one set of fees, Ms McPhee said.

“Many funds have online tools that walk you through this process in a few moments, and they’ll handle the transfer on your behalf,” she said.

People also can consolidate super funds through the federal government’s MyGov platform.

Advice service Moneysmart.gov.au says it can be easily done online through this step-by-step process.

• Go to my.gov.au.

• Log in or create an account.

• Link your myGov account to the ATO.

• Select “Super” and then “Manage”.

• Select “Transfer super”. This option will only appear if you have more than one super account.

“This will show you all of your super accounts and let you transfer your balance from one to another,” Moneysmart says.

Nest eggs had a good year in 2023-24. Picture: iStock

Hold your horses

Just because it’s quicker and simpler to switch super does not mean you should do it immediately.

There are costly traps that await the unwary, and switching your life savings should never be a knee-jerk reaction.

Ms McPhee has a key message on this: “don’t rush”.

“Be thorough,” she said. “The process of switching in this day and age is fast and easy, but it’s still crucial that you take the time to get it right.

“Do your homework or get advice. Be confident that the fund you’re moving to has a track record of delivering strong long-term returns and a really helpful range of services and advice to support you at those moments of significant change.”

It’s a trap!

Insurance, capital gains, market timing and tax-deductible contributions are among the problems that can plague super switchers.

Financial strategist Theo Marinis switches a lot of clients to superannuation platforms that use low-cost index funds that “save them tens of thousands in fees”.

He said one of the biggest traps when switching was potentially losing life insurance cover.

If all your money disappears from one fund, the attached insurance disappears too, and as people get older and health issues accumulate during their lives they might find it difficult to get new life cover.

“Even if we recommend new cover for somebody, we don’t replace the old cover until we have the new cover,” Mr Marinis said.

“Sometimes it’s worth keeping the old one open with a modest balance to keep the insurance in place.”

Mr Marinis said some super fund members might be hit with an unexpected tax bill if switching super funds.

“There can be capital gains when moving from one fund to another, although generally not in industry funds,” he said.

Financial strategist Theo Marinis

Aware Super chief of staff Katrina McPhee. Picture: Toby Zerna

While industry funds typically have investment units where the price of each unit incorporates capital gains and losses, retail investment platforms often leave capital gains and losses flowing through to the individual fund member. As capital gains tax no longer applies once a person switches their super to an account based pension after age 60, there may be timing issues to consider.

“Sometimes there will be costs, but then you do a cost-benefit analysis,” Mr Marinis said.

Tribeca Financial CEO Ryan Watson said other traps could include exit fees and having your money spending time out of financial markets – potentially painful in a boom period.

“Sometimes it can take superannuation funds four-to-six weeks to sell down your investments, move them to your new fund and then reinvest them,” Mr Watson said.

“This could mean that you miss out on some investment time in the market,” he said.

Another big trap that sneaks past super fund members and some financial advisers (and the author of this article!) is when trying to claim tax deductions for money voluntarily injected into super the previous financial year, but switching too soon.

Ms McPhee said: “if you’ve made voluntary contributions to your existing fund and intend to claim them as tax deductions, you must fill out a ‘notice of intent to claim’ form with your existing fund – and, importantly, receive a letter of acknowledgment from the fund – before transferring your super”.

“If you don’t, and your super is transferred first, you won’t be able to claim these contributions as a tax deduction,” she said. “It’s an easy trap to miss. Thankfully the process of filing the ‘notice of intent to claim’ is also very easy.”

These tax-deductible contributions, concessional contributions, can now total $30,000 a year so the potential financial loss from missing out can be significant. The Australian Taxation Office says once a concessional contribution leaves a fund, it is no longer a concessional contribution.

Making your mind up

Ms McPhee said it was not just financial performance that could make super switching a good idea.

“Look into the level of service available from your fund,” she said.

“Milestones in life – like having children, career changes and retirement – can sneak up remarkably quickly, and your circumstances inevitably change when they do. So look for a fund that offers a wide range of help, guidance and advice services – everything from educational seminars and webinars to online tools and simple advice at no extra cost.”

Tribeca’s Mr Watson said his firm was seeing more people take an active role in their superannuation.

“We are seeing people seek financial advice around investment structure, investment returns and administration fees,” he said. “Finding the balance between these three keys areas can add tens of thousands of dollars to your final retirement benefit. “Switching your superannuation fund is only a good idea if you are making an informed decision. Too often, people move between superannuation funds without doing the appropriate research, and this can lead to unintended negative outcomes.

Originally published as Superannuation tips for switching to a new fund to boost returns