The costs of switching super funds (or investments within super) may include:
1. The fees of the new superfund
This depends on the specific funds you are moving from and to. If you are moving to a low-cost industry fund and into low-cost index-based investment options, it is likely that you will pay less in fees (often far less). But be sure to check both the fixed cost of the fund as well as the total investment costs, which will be in the PDS.
If you have received financial advice to move to an SMSF or a Wrap platform, be sure to check the fees for each of those, which are in addition to the investment fees and can be substantial.
Find the following fees for each of your current super funds and the new super fund:
- the admin fee (for public super funds), platform fee (for wrap platforms and SMSFs), ongoing administration fees (for SMSFs)
- the fee for the investment options
- ongoing adviser fee if you are using an adviser
2. Capital gains tax
There are two broad types of super funds:
- pooled super funds (this is what you are invested in if you never chose your fund or if you chose a public super fund)
- individually taxed super funds (SMSFs, wrap platforms, and direct investment options)
Pooled super funds
Public super funds, such as industry super funds, hold each investment option in a single pool of assets. The purpose of this is to reduce the cost of managing it, and with industry funds (which are run for members and not for profit), these savings are passed on to members.
For instance, Australian Super manages over $335 billion of retirement savings on behalf of over 3.4 million members, and they have 10 investment options (Growth, Balanced, Australian shares, etc.), so they hold an average of $35 billion dollars in each investment option. Holding such a large amount in a single investment pool spreads the fixed costs so that it becomes much cheaper for members.
Since each investment option is one large pool of assets, the tax for these is done at the fund level, meaning the fund has to calculate the tax liability for the entire fund. This includes not only administration costs, but other items like tax deductions for insurance premiums through super, and so on.
A potential issue with these large single pools of assets would be if a member sold their stake and left, and the capital gains liability within the pool remained and was borne by the remaining members. To avoid this, the government requires public super trusts to calculate each member’s tax liability so that whenever a member leaves, their tax liability remains within the pool to be used for paying tax later, and this keeps it fair.
The way it works is that a member’s tax liability is ‘provisioned’, which means it is still in the fund earning returns, but what you see as your balance is your super investment value minus that provisioned tax amount.
When you move between investment options in public super funds (either between options within the same public super fund or to investment options in a different public super fund), your after-tax balance (which is what you see when you are logged in) gets transferred.
So, technically, you are not bringing your provisioned tax along to continue growing. However, provided you are moving to another pooled fund, there will be the provisioned tax from all the members in that investment pool you are moving to, which would compound in a similar way to the tax you left behind provisioned in your former fund.
For this reason, there is generally no capital gains tax issue when moving between investment options in public super funds or between public super funds.
Individually taxed super funds
These include
- SMSFs
- Wrap platforms
- Direct investment options, such as HostPlus ChoicePlus, Australian Super Member Direct
Unlike pooled super funds, which are taxed at the fund level (i.e., tax is done for the entire fund), these structures hold investments only for a specific individual. (or in the case of an SMSF, 1-6 individuals).
The result is that what you see in your account includes unrealised capital gains, and any time you sell assets, that reduces your balance, and future compounding of that unpaid tax is lost.
Furthermore, when you reach retirement age and move your super from an accumulation account to an account-based pension in an individually taxed structure, since you can move it in-specie (i.e., in its actual form and without selling down to move), as there is no tax to pay within an account-based pension, you can sell it and effectively have all the capital gains from all those years during accumulation wiped. The result is that selling before this time means paying tax that may otherwise never have had to be paid at all. More information on this page: the problem with pooled funds.
So, if you are in these structures, you need to think carefully about changing investment options, and ideally, you will want to seek to hold investments for the long term – at least until you have moved to an account-based pension (at age 60) – and only sell beforehand if it is worth the lost tax and compounding of that unpaid tax.
However, it may be worth paying out capital gains tax in these structures for a couple of reasons:
- to move from inappropriate investments, such as to reduce the risk of having your retirement funds concentrated in a poorly diversified portfolio or one that does not meet your personal tolerance of investment risk
- to move from a high-fee arrangement to a low-cost arrangement, as we will explain in the following section on adviser fees, and you can calculate the cost of leaving to see how many years of savings from going to a low-cost investment structure will take before it makes it worthwhile.
The tax hit when switching between them
When switching between a pooled super fund and an individually taxed super fund, even though tax is paid when you leave the individually taxed structure, the cost is more so when you begin it.
Let’s say your super in a pooled fund, including provisioned CGT, is 100k, and your balance is showing 90k. You’re getting gains on those additional 10k that exist within the pooled fund. Or, to put it more accurately, everyone is collectively getting gains on all of the provisioned tax within the pool.
When you leave and go to an individually taxed structure, you don’t have the benefit of the provisioned tax of other members, so the hit is more when leaving the pooled structure.
If you go back, you will immediately begin getting gains from the provisioned tax within the pool from other members, so it’s not really an issue going from an individually taxed structure to a pooled fund.
So, I would want to be sure before moving to an individually taxed structure.
3. Adviser fees
If you have an adviser, they charge upfront and/or ongoing fees.
On-off advice fees are less of an issue if you are planning on holding it for a long time because the per-year cost over those future years is much less significant.
Ongoing fees, however, can significantly eat into your returns, as explained in this page on how 1% fees cost you a third of your nest egg.
Not only do most advisers recommend wrap platform, where the combination of adviser fees, platform fees, and investment fees usually add up to over 1% of your entire asset base each year, but there are also advisers who work in a firm with an accounting arm who may recommend SMSFs for the firm to get paid annual fees in the thousands of dollars for SMSF administration on top of the thousands of dollars for adviser fees, and the investment fees are on top of all of that.
Some of the recommendations I have seen have been obscene, such as s couple nearing retirement who were with Australian Super paying $8,000 p.a. in fees, and the advice recommended moving to an SMSF that held a wrap account inside it with high-fee funds that they managed, for a total cost of $28,000 p.a.
With industry funds that are able to manage your money very effectively with virtually no work after it is set up, think carefully about why you would be paying an adviser a much higher fee for investments that underperform the overwhelming majority of the time.
To be clear, I am not saying that financial advice is not useful. One-off advice for a one-off fee can be very useful. The problem is that the ongoing fees (typically for managing investments) are usually for the benefit of the advice firm and to the detriment of the client.
Summary – the costs of switching super funds
For moving between public super funds, the costs of switching super funds do not include a CGT liability to consider, and the only difference is the cost of the new fund over the old fund, so moving between these is not an issue.
For those currently in an individually tax superannuation structure, such as an SMSF, wrap platform, or direct investment option, there is a CGT effect each time you switch investments, so you need to consider that carefully before leaving. However, if you have high fees, as is often the case with investments managed by an adviser, it is often better to leave as you will take an initial hit in tax, but the lower ongoing cost usually makes up for it, and you benefit in the long run, but be sure to do the figures.