BEGINNERS GUIDE TO SUPERANNUATION

The benefits​ of a rollover

Coverage of insurance policies available within the fund

Price

Administrative ease

The risks of a rollover

Loss of ancillary benefits 

Moving money from one fund to another

This is known as a ‘rollover.’ A rollover does not trigger a tax charge, as the money was either taxed when it arrived in the original fund (concessional contributions) or was not subject to tax (non-concessional contributions).

 

The benefits of rollovers – why they should sometimes be done

 

Rolling over super benefits can create problems, which are discussed below. Given this, it makes sense that a rollover would only take place where there are clear benefits to doing so. There are, of course, times when such a change is clearly in your best interests and should occur. Typically, the features that see one fund being selected over another include:

 

Coverage of insurance policies available within the fund

 

This is a very significant factor in determining whether one fund is better than another. The starting point should always be that a fund whose insurance policy has the best coverage is a preferred fund. Once this has been established, then other factors such as price can be included in the calculation. But the starting point should always be coverage.

 

It is like when you go shopping. Shopping at Kmart is cheaper, but it only makes sense if the product is at least as good as the more expensive one elsewhere.

Price

Everything else being equal, lower price is a benefit to members. Typically, super funds charge clients a mix of set administrative fees, which tend to be flat, and percentage-based management fees, which vary according to the amount of benefits within the fund and also according to the investment strategy being implemented.

 

Most super funds invest in the same or similar investment markets. Therefore, for a given allocation between growth and conservative assets, most super funds achieve similar investment results. Attaining a lower price for the management of these investments can make good sense.

 

When it comes to the cost of risk insurance being provided within a fund, price can again be a guide. But we do urge some caution here: when comparing two or more policies the lower premium is only a benefit if the policies are the same (or the cheaper one is better). It is not so simple as to say that lower price is always better.

 

To understand this, think about what the insurer is doing: it is setting a premium at a level that it thinks will allow it to pay out all claims and still make a profit. If an insurer is setting lower premiums, then it is either (i) more efficient; (ii) prepared to accept a lower profit; or – very importantly – (iii) anticipating paying out fewer claims.

 

If an insurer is calculating that it will face fewer claims, this may indicate that its policy is more restrictive. If the relatively lower expected claims lead to lower prices, then the cheapest policy is not necessarily the best. This is especially the case if the policy is so restrictive that a client has a greater chance of having a claim refused. 

 

Administrative Ease

 

Because employers often use different super funds for their members, many people end up with benefits in more than one fund. It can make sense to consolidate benefits into one preferred fund. Doing so means that the member only has to keep track of one fund, not several.

 

As well as administrative ease, consolidating funds often reduces the overall level of fees paid by the member. This is especially the case for the ‘flat fees’ typically payable within most funds. As the name suggests, flat fees are payable irrespective of the level of benefits within the fund. This means that two funds lead to two sets of flat fees, and so on, whereas one fund will only incur one set of flat fees, regardless of the balance within the fund.

 

The risks of a rollover – things to be aware of

 

Loss of ancillary benefits

 

This is the main risk rolling money out of one fund and into another. Superannuation funds are supposed to be managed for the sole purpose of providing retirement benefits to the members of the fund. These retirement benefits are often referred to as the core benefits of a fund.

 

That said, the super rules also allows a super fund to provide ‘ancillary benefits’ to its members. These ancillary benefits include risk insurances, especially death and TPD benefits.

 

As a result, many managed super funds provide risk insurance benefits to members. This is often done on a default basis, where all members who meet certain thresholds are entitled to stated levels of insurance. The premiums for these insurances are deducted from member balances.

 

When a member rolls their superannuation benefits out of a given fund, they will lose access to any ancillary benefits being made available through that fund.

 

When a member rolls their superannuation benefits into a given fund, they will gain access to any ancillary benefits being made available to that fund.

 

The main risk of switching from one fund to another is that the new fund might not provide the same level of ancillary benefits as the one that is being closed. For risk insurance benefits, this may mean that the member loses some or all of their insurance cover.

 

This raises the prospect of an insurance event happening for which the member has become non-insured due to the change of fund.

 

Many super funds provide what is known as default insurance cover. This is cover that every member automatically gets. This cover does not continue if the member rolls over out of the fund.

 

What this means, of course, is that a decision to rollover super funds often becomes a decision to change default insurance providers. You can read more about the risks of changing insurance policies – and especially the risks inherent in doing so – in this article on our AFSL’s website.

Types of super funds
Women's superannuation

 ©2016 WHOLE WEALTH

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