The Federal government dropped a bombshell on the superannuation industry over the weekend with the announcement that members who had lost income due to the COVID-19 pandemic would be able to access their superannuation balances early. Members can withdraw up to $20,000 tax-free in two transactions – one before 30 June and one after.
Given the significant impacts this could have on individuals and the economy, both in the short and long term, I reached out to two experts for their take on the situation. Jeremy Cooper, Chairman of Retirement Income at Challenger Limited and formerly the Chair of the government’s Super System Review in 2010; and Graham Hand, founder of Cuffelinks (now Firstlinks), and widely regarded as an authority on investing and super.
Superannuation was legislated to be for the sole purpose of providing benefits to members in retirement, but in the current environment, the relevance of that test is being questioned. Hand says that in the current ‘extraordinary’ circumstances he is not one to stand in the way of people needing to draw on their own money to sustain just the basics of day to day living.
The issue, however, may be the scale of the withdrawals. Hand is a part owner of a restaurant and has seen the operators of that business go from working 80-hours a week to now being unemployed.
“I think the government is underestimating how much they will draw down, but it will be to pay rent and bills. People are going to be destitute; one million people are going to be unemployed. They have a right to access their money,” Hand said.
Liquidity issues
Cooper warns that there could be a larger exposure to claims than the 15% of the full-time workforce (1.35 million people) the government is expecting to claim. He is concerned that funds have uncapped exposures, only limited by the $20,000 per member withdrawal.
However, according to figures published by Super Guide, some popular super funds had average balances that weren't much above $20,000 at the end of 2019. With the recent market volatility, those balances are likely to be even lower now.
Other funds face challenges not just due to the balances of their members, but due to the asset allocation of their default investment options. One popular Industry Fund holds no cash or fixed interest in their flagship default option according to their website. The option is 33% invested in Private Equity, Infrastructure, and Property, which cannot be easily liquidated.
“Super funds currently don’t have formal access to emergency liquidity from the RBA. Access by super funds to the RBA ‘discount window’ would require an amendment to the SIS legislation prohibiting funds from borrowing and other administrative steps”, Cooper said.
Hand also noted the potential issues caused by the mismatch in liquidity. He referenced a conversation with the CIO of a large industry super fund who said, “we are going to get smashed.”
Getting advice
Cooper is also concerned about the ability for members to obtain advice in the current climate.
“Given that people accessing early release will be in financial hardship, they are unlikely to be in a position to pay a financial adviser to help them. Super funds might have to be at the ready to advise members under the intra-fund advice framework. Otherwise, people considering what could be a very poor decision for them, might go without any advice at all.”
A source in the financial planning industry said that advice firms and funds were already preparing for this situation, but some would be far better equipped than others to deal with the sudden influx of advice requests. They also noted that some funds had suspended advice meetings with clients as they attempted to deal with the logistics of working remotely.
The long-term impact on retirement balances
One issue that can’t be ignored is the impact on retirement balances. This one could be a ‘sleeper’, as those taking withdrawals now might be 30 years or more from retirement. With market prices so low right now, any money taken out now could have an outsized impact later in life. The exact size of the impact is hard to quantify as it depends on:
-
Your age and your spouse's age
- Whether ‘top-up’ contributions are made down the track
- How much higher or lower asset prices are if and when those top up contributions are made
- Whether or not your spouse also takes a withdrawal.
“The bottom line is that you will have less of your own money in retirement than you would if you didn’t opt for early release. You will also be exiting at poor market prices and by doing so, taking out $20,000 will chew up a bigger proportion of your super than it should”, Cooper said.
Most default ‘MySuper’ investment options have a targeted return of inflation plus 4% p.a. over the long term. Assuming this goal is achieved, a member who withdrew $20,000 with 30 years to retirement would be around $60,000 poorer in real terms at retirement, compared to if they’d left that money invested.
“The thing is to realise the long-term impact and to have a plan to make up the difference over the coming years if possible. People should get advice if they can. Even if it’s just a matter of having someone check that you’ve accessed all the other support available from government and banks on things like mortgage interest holidays.”
Update
The Chair of the House of Representatives Standing Committee on Economics, Mr Tim Wilson MP, stated, "In the last round of hearings the superannuation sector dismissed the committee’s concerns about liquidity associated with the structure of their funds. Considering the super funds are now claiming liquidity issues which is inconsistent with the spirit of evidence they had previously submitted, the committee is reserving its right to hold a hearing with APRA, and the superannuation sector in the interests of financial stability”.
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brad northfield
People should be able to get access to thier superannuation in cases of hardship. Otherwise, there is a possibility some of them may not reach retirement due to the extreme personal stresses they and thier famalies will be under. Large percentage of Australians have been living off credit and have very little savings to fall back on.
Ian Ashman
Monumentally stupid and short-sighted for many of the reasons explained above. There are alternative ways for governments to fund short term cash needs (and they are doing it) without cocking up the super system.
Kylie Carnegie
Doesn’t early access to super mean less strain on Centrelink? We are in an unprecedented territory - health and financial crises at once. Let those who have a super nest egg access it, and allow Centrelink to manage the wave of need from younger parts of the population who’ve not yet built theirs.
Michael Whelan
People can't eat their superannuation statements. This is obviously one of, if not, the last options for people given they often have few other savings apart from compulsory super. The lack of basic empathy is staggering.
Mark Dawson
Depends where you are on the age and desperation scale. The government loves tinkering with super. By the time I retire I'm certain they'll come up with some other ways of taxing the crap out of it. I'm guessing they could even borrow it without asking and go on a massive junket.
Robert Baker
I am of the view that this is a very astute call by the Government and would encourage liberalising access further, and increasing the amount that can be withdrawn. Australia is at imminent risk of a deeper drop in GDP than has been experienced in all of our lifetimes. The largest employer in this country is small business. Many are confronting deep duress e.g. people off the land (floods, droughts bushfires then corona (or was that Greta) virus) and entrepreneurs who are highly indebted whose revenue is turning down sharply. For these people, the turndown threatens ALL of their accumulated capital and their homes. I believe it should unequivocally be offered to ALL superannuation members (no qualifying criteria) and up $20k this financial year per member, and review come July. Nobody obliged to withdraw - but the leveraged impact of flexibility due to this source of liquidity can be life altering and have a bigger impact on the members retiremnt than keeping this amount in super. The difference between emerging from the impending/recession owning a business, or bankruptcy effects far more people than most would like to think.
Gregory McLeod
I'm 65yrs old and will work 3 more yrs do you think my super will bounce back for me befor this crisis my super was sitting just over 700,000
Miranda Austin
Three times now the super funds have managed to lose most of my super in GFC's. The first two times were six figure sums.... what was left was mainly eaten by fees. I'm not sure it's not a mythical beast.
peter calo
If a 20 year old takes out $10,000 today, it will cost him or her at least $100,000 in retirement, and maybe as high as $300,000. Think about that? That's an extra $5,000 every year in pensions the taxpayer must find. This is an example of short term thinking, because we humans are poor at imagining the future. Unless you need the money to save your or your spouses life, super should not be allowed to be touched until retirement.
Barry Braes
with SMSF's, if the value of assets and return by way of dividends drops below eligibility requirements for Age Pension, then we'll just have to go on a pension, right?
Patrick Poke
Barry, you're best off checking that with Centrelink, they'll be able to advise if the change in your circumstances might make you eligible for the Aged Pension.
Chris Matsias
co contributions to replace the $20K i.e. take $10k in May, put $1 k back in June as a co contribution = ( $0.5k in Oct from government added to super ), then take out another $10k in July reduce budget by $20 per week and make a $1 k co contribution next 13 years ???
Ross Salmon
Standing back and looking at the possibilities that will be forced on the Superannuation Fund Managers being forced to pay out up to $20,000. Consider their illiquid due to the types of investments, i.e. Property, Private Equity, Research, Growth Shares etc. .Forced to find cash for payouts and to manage to have a viable fund to manage after some normality returns to the market they will increase the spread between buying and selling, give thought to this before drawing down.