Ask An Adviser - Will A High Interest Savings Account Give Better Returns Than My Super Fund?

Top answer provided by:

Ryan Scherini

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Hello Roy,

Thanks for your question. It is a question that is quite common now amongst people that I see who are worried about the current market conditions.

Firstly, I wanted to provide you with some basic information on share markets, and whilst some might consider simple, it underpins the entire investing world. This concept is called supply and demand and it influences what consumers are willing to pay and sellers are willing to accept for goods and services. When looking at investment markets, whether this is bank accounts, housing or share markets you can see supply and demand factors at play. Whilst most of the time, we have a happy equilibrium with supply and demand and consumers are willing accept the price of sellers, sometimes you get shocks to the system.

An example of a supply shock can be seen locally with the flood on the East Coast. Farmers in this region who have had their farms and stock decimated can no longer sell to the supermarkets. In order to cover costs, what remaining stock they have, they must increase the price on, which in turn results in supermarkets passing on those costs. An example of demand shock was seen during COVID. We saw items such as hand sanitiser, toilet paper was flying off the shelves. As a result, prices increased dramatically in the short term and some shops put in a limit on what you could purchase.

The purpose of these examples, was to show you that these shocks to markets, are typically short term and impacted by things outside of our control. However, it’s easy for someone like me, a financial adviser to tell you, everything is going to be ok, things will correct. It’s not our money. However, what we do have, is years of experience managing client’s emotions and behaviours through market cycles.

There is an analogy that people often refer to investing like riding a roller coaster. There are ups and downs, you can see these before you even get on the ride. However, it’s our emotions that really impact the ride. Things like anxiety, excitement, fear and maybe relief are some examples. There is a great chart which you can see below (full link available here):

The basic analysis of the current market condition centres around the fear of inflation and what impact this will have on global markets. Will we have another 1990’s on our hands where we need 18% interest rates to quell inflation? Inflation has been driven by several factors, such as significant Government spending throughout COVID, low unemployment and other market shocks around the world surrounding changes to green energy, Ukraine/Russia tensions, China’s net-zero COVID policy and others such as the local floods. There was also a slower response to tackling inflation earlier in the year in fear from Central Banks that the inflation being reported was a temporary issue from COVID.

It feels like a long-winded way of answering your question, but I provided this preface because if you understand where you’ve come from, it might be easier to provide where you’re going. Firstly, I’m not aware of what your risk profile was prior to the recent correction. Had you taken on more ‘risk’ in your portfolio than you were comfortable with to chase returns? (We tend to only know the answer to this when the markets are down). Was your super fund already conservative? What are your monthly/yearly pension payments and what impact is this having on your balance? There are lot of questions that impact your fund balance. However, your question: should I change to a high interest savings account?

Firstly, lets see at what you’ll gain from this decision. The obvious choice being some stability in your returns. A quick look at Canstar which is a comparison tool, shows me that you might be able to achieve approximately 2% on a high interest bank account (subject to bonus eligibility) or about 4% on a 12-month term deposit, depending on the provider. Whilst this might seem great, compared to the recent returns of the share market. The silent killer to your money is still inflation which is raging at over 7%. Meaning the cost of the things you’re buying is increasing at a faster rate than what your savings is growing. The net effect being that your funds will likely go backwards as well over the long term. Locking up your money in higher interest accounts may also mean you don’t have access to the capital to take regular payments, especially if in a term deposit or high interest account that requires regular deposits (and no withdrawals). The other major impact of selling out and withdrawing your superannuation is you’ll crystalise (lock-in) your losses that have recently been experienced.

There are some things that you can control during this period though, such as:

1. Updating Centrelink with your asset values, you may get a higher fortnightly payment if your assets are lower.
2. Review your budget and spending - can you reduce what you’re drawing out of your super/pension fund? (Subject to any minimum requirements.)
3. Do some research into your super fund’s investment option. Consider things like the asset allocation of the fund. How much exposure to riskier assets you have (i.e. share market and property assets). Also look at things like long-term performance.

Roy, I’m not able to provide specific advice as to what decision you should make as I don’t know you personally, your financial situation or aspects surrounding your goals and objectives. This response is designed to give you general information about how markets work. To reinforce the feelings and emotions you’re having are normal and experienced by everyone. Whilst it would be easy for me to say be patient and markets will recover in the medium-long term, I understand the anxiety of this recent drop and the impact it may potentially have on your retirement goals. If this response has not been enough to settle your concerns, I can only suggest seeking personal advice from a financial adviser in your local area. Consider finding someone either on Adviser Ratings or the Financial Planning of Australia’s website.

While the Adviser Ratings Website facilitates the question and answer functionality, all such communications are between users and authorised financial advisers, of which Adviser Ratings has no affiliation. Adviser Ratings is not the advice provider and does not provide financial product advice and only provides information that is general in nature.

Article by:

Ryan Scherini

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