By Alex KelseyFinancial Adviser
27 August 2020
Superannuation affects every single one of us. It sways government policy, it influences voters, it creates a comfortable retirement for many, it also currently helps many out of a hole with cash flow concerns, and it’s not going anywhere. It’s here to stay.
The stats are mindboggling. Over $2.73 trillion is currently held in superannuation assets. $717bn within Industry Funds and $678bn held by Self-Managed Super Funds. The Retail and the Corporate sector make up a further $614bn. This figure was zero just thirty years ago.
Governments have and will continue to redesign certain aspects of super. To suit them, to suit you, that’s open to question, however it pays to stay informed and prepared.
Risks of Early Access to Super
In March, Canberra acted swiftly in response to the COVID-19 Crisis by allowing early access to Super up to $20,000 for those whose employment income was impacted by COVID-19. Queue $30bn exiting our superannuation balances with many stories of discretionary spending on boats, cars, and motorcycles.
Clearly the strategy was sensible however much the Industry Funds complain.
In the midst of this pandemic, people have to access the basics. Young workers with no work can quite rightly access their hard-earned income. Parents with children need a roof over their head and need food on the table. For many, this short-term reprieve is critical but be aware of the risks:
- One obvious risk of releasing superannuation early is the public having reduced benefit at retirement. Due to compounding interest and depending on the account holder’s age (the younger the account holder, the greater the impact) an amount of $20,000 now is likely to be far greater by the time one retires. Conservative figures for say a 30yr old with 35yrs of work before retirement would equate $110,320 to a value of $20,000 today. Invested sensibly, in fact these figures could be far higher for example using a 9% return the figure is closer to $500,000 of lost retirement benefits. Older people will not be hit as hard but a 50yr old may still lose $80,000 with 15yrs left to work.
- Other risks include timing. Individuals may have accessed their super at a low and miss out on the growth. By way of example, markets domestically and overseas saw large gains wiped from their super balance between February and March of this year. Markets have reacted surprisingly positively since a low in late March (whilst the economy battles its own crisis) but the relative recovery shows the difficulty in timing a market and this also relates to the timing when accessing super early – there are investment performance ramifications in the long-term using this strategy due to the timing of when super is accessed.
- Another important risk to be aware of is low super balances that individuals use to fund insurance premiums. A withdrawal of super may mean that these individuals will no longer have a sufficient cash component to fund insurance premiums. Covers may be cancelled and individuals will be underinsured. This risk has become further increased due to recent legislation stating that member balances under $6,000 will have default insurances cancelled. It pays to stay informed.
Two strategies to contribute further to the $2.73trn in Super
- Work Test – Making Super Contributions over 67
Up to 30 June 2020, once you reached age 65 you needed to meet the requirements of a work test if you wanted to make non-concessional contributions into your super account. Legislation has changed in order to align the work test with the Age Pension (which is to increase from 66 to 67 from July 2023). Therefore, you can now make personal or non-concessional contributions into your super account without needing to meet the work test requirement. After age 67, you must be able to prove you are gainfully employed to contribute however it may also be possible to use the one-off work test exemption or downsizer super contribution.
- Carry Forward Contributions
In order to further add to the $2.73trn in super and build your retirement savings, you may be able to apply use any unused concessional contribution caps on a rolling basis for five years. Therefore, if you do not use the full $25,000 in 2019-20 and 2020-21, then you can carry forward the unused amount up to five years later.
Women in Super
The gap between women and men at retirement is not pleasant reading. From data released by the Association of Superannuation Funds in Australia, on average a women’s retirement balance is more than 40% less than men. Why?
- Lower lifetime earnings
- Wage inequality
- Reluctance to negotiate better pay
- Increased chance of stopping work or devote time to caregiving for children/parents
Rather like the previous inequality in cricket (did you know that the men’s Cricket World Cup winners received $4m and the women last received $75,000!!), this needs a fix, so what strategies are there on offer?:
- Take control of your savings – more than 40% of Australians have several superannuation accounts that are consuming more than $1.96bn in fees each year. These fees may well be unnecessary.
- Maximise contributions before, during, and after work disruptions – reduced lifetime earnings for women are often due to having to cut back on paid work. If possible, it can pay to work for family-friendly employers who offer parental leave and flexible work hours. Easier said than done – yes!
- Invest, Invest, Invest! – women on average do tend to invest more conservatively than men and in fact many women will opt not to invest at all but rather put their monies into bank accounts. Such a long-term investing strategy may leave a shortfall in retirement. Seek professional advice on how to put your savings to better use.
- Working futures– often our long term employment plans are out of our control but there is no debating the financial benefits of working longer. By delaying retirement, it is possible to increase contributions to super. This strategy also results in a delay in super withdrawals and can reduce the required withdrawal amounts into the future. Women live longer and have interrupted working careers which further impacts retirement assets. If it is possible and is an option, finding that dream job which allows career longevity will aid the above benefits.
- Lay a plan for healthcare costs – women live longer by two years on average. That means increased healthcare requirements. Women often provide care to spouses and when they predecease, require long term care at a greater rate. By planning and maximizing savings, women can reduce retirement concerns.
Reduced wage inequality and a fairer reward system may also help as shown with a recent update from the ICC who announced a dramatic increase in prize money for our best women’s cricketers. Time for all employers to follow this lead.