Changing Super Funds: What Are the Risks You Need To Be Aware Of?

Changing super funds is a relatively simple process, but you just need to be aware of some risks in doing so and make sure that you’re switching super funds for the right reasons.

Changing Super Funds

Changing super funds is the process of rolling over some or all of your superannuation balance from one fund to another.

The main reasons you might consider this are to reduce fees, improve investment returns, or gain access to a wider range of investment options.

You may have even switched jobs and would prefer to consolidate your super into one account.

How To Change Super Funds

To change super funds, you will need to complete a superannuation rollover, withdrawal or transfer form (depending on the terminology used by the super fund). Such a form can be found on the website of the super fund you plan on leaving, or the super fund you would like to transfer your balance to.

It is often better to contact the super fund that you plan on transferring your balance to, as they will handle much of the transfer for you and are likely to complete the transfer quicker and more efficiently, because they want you as a member of their fund as soon as possible. A super fund that you are leaving might not be so helpful.

If you plan on closing your super fund in full. You can use this ATO form, instead. Once completed, it can then be sent to the super fund you are changing out of. This form cannot be used for partial rollovers, only for full balance transfers and subsequent closure of your non-preferred super fund account.

Risks of Changing Super Funds

There are a number of risks and disadvantages that you should consider before changing super funds.

Cancelled Insurances

If you close a super account in full as a result of switching super funds, the insurances within the account are likely to be cancelled also. And, while this will eliminate premium costs, it might also leave you under-insured. Sometimes, obtaining replacement cover can be difficult or more expensive, especially if you have had health issues.

Consider: Obtaining replacement insurance cover prior to changing super funds, or leaving a sufficient balance in the super fund, so that the insurances remain in place and premiums can continue to be paid.

Lower Investment Returns

Just because a super fund out-performed most others in one year, does not mean it will continue to outperform in years to come. Clever marketing strategies, timely investment strategies and carefully selected wording can help a super fund’s returns look good over a chosen time period. It’s important to remember that past-performance is no guarantee of future performance.

Consider: Make sure you are comparing like-for-like investment options (hint: look at allocation to growth assets within the investment option) and research any other investment options within your existing fund that may be better performing or more suited to your needs.

Time Out of the Market

Changing super funds can take anywhere between 1 and 4 weeks (and occasionally longer). During this period, your balance will not be invested and will not earn a return.

Consider: Is the benefit of changing superannuation funds going to outweigh the time out of the market?

Transaction Costs and CGT

When you change from one super fund to another, investments may need to be sold within your existing fund and purchased within your new fund. This can result in transaction costs, such as brokerage and buy/sell spreads, as well as CGT – both of which will reduce your balance during the process.

Consider: How long will it take to recoup the transaction costs and CGT based on the reduction of fees in the new account, or expected improved investment returns?

Lost Contributions

When switching super funds, you need to be sure to notify your employer of your new super fund details. Failing to do so may see your contributions go to your old fund, or sent back to your employer.

Consider: notify your employer of your new super fund details as soon as possible and monitor your employer super contributions during the rollover period to ensure no contributions fall through the cracks.

Our financial planning firm, Toro Wealth, specialises solely in helping 50 to 70 year-olds optimise their financial position in the lead up to retirement. If you’re interested in learning more about our service and cost, click here.

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