The advantages of rollovers
Coverage of insurance policies available within super
The risks of rollovers
Loss on ancillary benefits
Chapter 2- Transferring money into super:
A member of the superannuation fund is entitled to transfer his or her benefits from one fund to another. This is known as a ‘rollover.’ A rollover does not trigger a tax charge, as the money was either (i) taxed when it arrived in the original fund (concessional contributions) or (ii) was not subject to tax (non-concessional contributions).
Rolling over superannuation benefits has both advantages and disadvantages. Obviously, it should only be done where the advantages outweigh the disadvantages. We will examine the common advantages and disadvantages in the next two sections.
THE ADVANTAGES OF ROLLOVERS
There are various advantages to be had by rolling superannuation benefits over from one fund to another. These advantages are discussed below.
One of the main reasons to roll benefits over from one fund to another is to consolidate benefits that are spread across a number of funds into just one or two funds.
Under the terms of the superannuation guarantee, employers must make superannuation contributions on behalf of eligible employees. Employers often have a preferred fund into which they pay contributions on behalf of their employees. This can often mean that people who change employers end up with benefits being held in more than one fund.
Consolidating benefits into one fund can reduce the administrative burden of managing superannuation benefits. It can be easier to manage superannuation when all benefits are held in a single account.
As well as administrative ease, consolidating funds often reduces the overall level of fees paid by the member. Superannuation funds typically charge two types of fee: flat fees that are imposed regardless of the balance of member benefits within the fund; and variable fees that change according to the balance of member benefits within the fund.
Consolidating superannuation funds typically reduces the overall amount of ‘flat fees’ paid by a member. 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.
For example, a person may have two superannuation funds and hold $20,000 of benefits in each of them. If they are paying a flat fee of $200 per year per fund, this is $400 in total, or 1% of their total benefits of $40,000. If they consolidate all of their benefits into one fund, and therefore only pay a single flat fee of $200 per year, then the total fee falls to 0.5% of their benefits.
COVERAGE OF INSURANCE POLICIES AVAILABLE WITHIN THE FUND
As discussed below, superannuation funds often make life insurances available to their members. The availability of life insurance can be a significant factor in determining whether one fund is better than another. Therefore, rolling benefits over from one fund to another with a second fund with a superior insurance policy can make good sense.
It can be difficult to gauge the relative merits of different insurance policies. We encourage you to get advice before changing super funds in pursuit of better insurance.
As discussed above, super funds typically charge members a mix of ‘flat’ administrative fees and percentage-based management fees. Consolidating superannuation benefits into a single fund can minimise the flat administrative fees that are paid on the total benefits.
Additionally, rolling benefits from one fund to another can reduce the variable management fee that is paid if the ‘new’ fund charges lower fees than the ‘old’ one. 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.
Management fees are not the only fee that can vary between funds. Insurance fees can also differ between two or more funds. Therefore, it can be possible to obtain cheaper insurance by moving from one fund to another. However, we do urge some caution here: when comparing two or more policies, a lower premium is only a benefit if the policies are the same (or the cheaper one is better). When it comes to insurances, lower prices are not 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.
Remember, if a claim is refused, it was a waste of money having the policy in the first place.
THE RISK OF ROLLOVERS
LOSS OF ANCILLARY BENEFITS
The potential loss of ancillary benefits is the major risk when rolling over superannuation benefits.
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 allow 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 the fund they are leaving. And 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 existing insurance cover. This raises the prospect of a client being an insured in the event that they need to make a claim.
Basically, a decision to rollover super funds often becomes a decision to change insurance providers. Changing insurance providers can lead to a reduction or complete loss of insurance coverage. 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.