Frequently asked questions

Changing how your pension is invested should be done in accordance with your own personal needs, not what’s happening in the market.

Switching into a more conservative option such as cash after a negative return might feel like it will protect you against future losses but it could actually end up costing you more.

This is because while your investment option may have gone down in price (below what you initially paid for it) when you switch out of it you are locking in a loss. Markets are buoyant so they’re constantly rising and falling, which means the value of the assets your super is invested in fluctuate on paper, but losses only become concrete when you choose to sell the asset.

Before you switch, it’s crucial to understand the consequences. If you sell at a loss, you’ll be moving less money than you originally had, which makes it even harder for your money to go up in value. And when the price of that particular option goes back up and you want to get back into it, you’ll have to pay a higher price to do so and you’ll have fewer units than you started with.

Finally, if you remove your investment during a down market, you won’t benefit when the market rebounds.

Switching versus staying
In case you’re still not convinced, let’s look at what can happen to the value of a $10,000 balanced portfolio’s value over a six year timeframe when it’s owned by two very different types of investors.

 

In the chart, the orange line shows the growth of a $10,000 sample 70/30 balanced portfolio from 1 January 2003 until 31 December 2009. It really shows the damage constant investment switching can have on a long term investment such as your pension.

Investor 1: Chose not to switch investment options during the entire timeframe. At the end of 2009, their balance would have been $15,728.

Investor 2: Panicked and switched their investment to cash. Unfortunately for them, they chose the wrong time – when the market ‘bottomed’. By switching to cash, the investor missed out on the market rebound. This investor’s money was now worth only $12,761 at the end of December 2009; a difference of nearly $3,000.

The portfolio is hypothetical only and is calculated by a weighted average of the asset class index returns shown in accordance to the following asset allocations. 32% Aust Shares (S&P/ ASX 300 Accum Index), 25% Aust Bonds (UBS Warburg Aust Comp Bond Index), 5% Cash (UBS Warburg Bank Bill Index), 20% International Shares (MSCI World Net Div Reinvested Accumulation Index), 10% International Shares $A Hedged (MSCI World Net Div Reinvested Accumulation Index $A Hgd), 8% REITs (S&P/ASX 300 Property Accumulation Index).

While no one can predict what will happen in financial markets it’s important to remember that market ups and downs are a normal part of the sharemarket’s cycle. While it’s impossible to predict in advance just when these ups and downs will occur in sharemarkets, the good news is generally returns become less volatile over time.

Although using a cash account such as a term deposit for your retirement savings might seem like a good idea when the market is down, the account based pension has certain benefits that just can’t be beaten.

For example, where your entire retirement savings are kept in a cash account, you would have to pay tax each financial year at your marginal tax rate on any earnings it makes. In the Pension you do not pay tax on any of the earnings the pension makes.

Your superannuation is also excluded from the assets test until you reach age pension eligibility age. But any savings you have outside of super will be taken into consideration when it comes to eligibility testing for Government benefits.

Investing in cash is an option that’s already available through your super.

You can invest in the Russell Australian Cash Enhanced Portfolio which invests in a range of cash and short-term fixed interest securities. This option is best suited to investors who want to invest in cash with an investment timeframe of at least one year. For more information about the Russell Australian Cash Enhanced Portfolio please refer to the product profile or call 1800 300 353.