9 minute read
The delicate balancing act of early release super
ANDREW YEE is director of superannuation at HLB Mann Judd Sydney.
The design and rollout of the federal government’s early release superannuation scheme has been the subject of much conjecture in recent months. Andrew Yee argues how people who have accessed the scheme are going to adequately restore balances in time for retirement is of great concern.
The early release superannuation (ERS) scheme has unquestionably been a lifeline for many Australian workers financially affected by COVID-19, whether it be through redundancy or reduced working hours. Being able to access money they wouldn’t normally be able to has meant the difference between surviving and not being able to pay rent or provide for a family.
Accessing a portion of their entire super savings now, however, will adversely impact on a person’s ability to retire comfortably later in life; the short-term gain could have negative longer-term consequences.
The government’s data indicates a vast number of presumably lower to middle-income earners have benefited from the ERS scheme. An estimated 3 million people have taken advantage of the scheme in some form ($10,000 up to 30 June this year and a further $10,000 from 1 July to 31 December), with around $42 billion exiting super balances to date.
It’s a drop in the ocean compared to the total superannuation pool of around $1.5 trillion, but it’s a significant amount nonetheless. It is also enough to impair the government’s ability to support some of these people in the long term and will undoubtedly dent federal revenues for many years to come.
To be eligible, those applying need to satisfy certain criteria, including having to be unemployed, to have recently lost a job, to be receiving government support payments, to have lost 20 per cent or more of their working hours, or to have lost 20 per cent or more of their turnover as a sole trader.
Financially vulnerable affected
Many who have accessed the scheme are purported to be in lower to middle-income brackets, working in sectors most affected by the economic shutdown, such as hospitality, which attract a higher proportion of casual and part-time workers. Depending on their life stage, some may not be in a position to plan for retirement or have excess funds available to top up their super.
Whether or not the introduction of the ERS has diminished the integrity of the superannuation system is debatable, but it has been one of the untouchable assets since the modernisation of the super system in the early 1990s. It wasn’t designed to accommodate short-term financial liabilities but, then again, a once-in-a-lifetime, unprecedented event such as a global pandemic wasn’t envisaged either.
From the government’s perspective, the scheme has been more than justified, and it has made accessing required funds straightforward, which greatly assisted those who needed it most. As alternatives to the ERS scheme, however, some people could look to other means of funding, such as debt, social security benefits and other government incentives, such as JobSeeker or JobKeeper.
Road to financial recovery
Fortunately, however, for those Australians faced with rebuilding their super balances, no matter what the remaining balance, there are a number of practical strategies they can consider when looking to maximise contributions.
These include:
1. Make a concessional contribution:
Up to $25,000 can be contributed each year from employer contributions as well as salary sacrifice and member concessional contributions.
• This strategy is maximising tax-deductible contributions and should be considered by all taxpayers, irrespective of their financial position. It will work especially well for those who have accessed the ERS scheme, as for those on lower to middle incomes, they will gradually move up the ladder and can increase their concessional contributions along the way. As with all strategies, however, it comes down to planning, getting the right advice, and for those who can’t access advice, having the discipline to execute their own plan effectively. It’s hard starting from ground zero, but it’s very achievable for people to recover from a poor financial position. One method would be to include maximising contributions as part of year-end tax planning; that way it’s not too onerous a task for people arranging their own finances.
2. Use unused concessional contributions cap over five years (assuming the super balance is under $500,000):
Since 1 July 2018, people could start accruing their unused concessional contributions cap and carry it forward to future years. This means if people don’t use the full amount of their contributions cap in a particular year, they can carry forward the unused cap amount and take advantage of it for up to five years later.
• This measure provides more flexibility to the traditional annual concessional contributions cap; if for whatever reason you’re not able to utilise your cap for one year, you can carry it forward to the next year with whatever cap you have available, for up to five years. It’s a new and recent measure, with financial advisers needing to keep track of how much of the cap clients have or haven’t used. Previously, it was use it or lose it, but now individuals fortunately have the ability to carry it forward. The strategy helps if a person has a windfall or sold an asset, as they will be able to top up their super and make up for those lost years. It is a powerful strategy for people to consider in rebuilding their super for whatever reason, including having accessed the ERS scheme.
3. Make a non-concessional contribution:
Up to $100,000 a year or $300,000 brought forward over three years can be contributed on a non-concessional basis. The cap will be indexed in line with the concessional contribution caps.
• Realistically, this strategy will be slightly out of reach for those without very healthy super balances, but is one to consider once they’re in a better financial position. Typically, later in life, when mortgages have been paid off and once dependants have been educated, the extra savings available can be used towards this measure. If a person is in that position, they can build a super balance back up fairly quickly, but again it comes down to discipline in setting the money aside and not putting it towards discretionary items, such as new cars and holidays.
4. Contribution splitting:
A person can split up to 85 per cent of their concessional contributions from a prior year to their spouse as long as they’re under their preservation age or under 65 and still working. If the spouse is eligible to use any unused concessional contributions caps carried forward, then up to 85 per cent of these contributions could be split and allocated to their spouse as well.
• This strategy would be suitable for couples where one spouse enters the relationship with a higher super balance, or is able to accumulate their superannuation more rapidly than their partner, which then allows them to split and allocate their concessional contributions to their spouse with the lower super balance. This strategy could be in addition to the spouse super contribution, where voluntary contributions made on behalf of a spouse, depending on their spouse’s income, would be eligible for a tax off set of up to $540.
5. Take advantage of the government super co-contribution:
Low or middle-income earners who make a personal aft er-tax contribution to their super fund can also access the government co-contribution up to a maximum amount of $500.
• This strategy should be easily obtainable for most who have taken, or plan to take, money out via the ERS. An extra $500 contribution from the government, every year, certainly adds up over time.
Reading the fine print
Further to these strategies, people rebuilding their super balance should try to ensure their super is invested in longer-term growth-style assets, rather than conservative, cash-style liquid assets.
Compounding interest over time will more quickly rebuild the super balance lost and take it forward. If you invest in cash or cash-type products, it will take a long time to rebuild and in some cases be too late if nearing retirement. Fortunately, a large proportion of those who have accessed the ERS have time on their side and will have a higher risk appetite in terms of super investments.
Importantly, for people who don’t have a financial adviser and have accessed the ERS, discipline is key to restoring their balance. Information will be harder to get and keep track of, but it’s not an insurmountable task, and while the road back to financial security is long, it’s never too late to implement a financial plan.
In its recent budget announcement, the government also committed to clamping down on poor-performing super funds and strengthening regulations that compel funds to act in the best interest of the member. One measure announced was the development of a new online tool called YourSuper to help people choose an appropriate fund.
Super savings can also be rebuilt quicker by simply switching to a low-cost fund or one that incorporates low administration and investment fees.
When choosing an investment strategy, super fund members need to consider factors such as their age, appetite for investment risk and how long it will be before they reach retirement age. Everyone, especially those who have accessed the ERS scheme, should move to consolidate any unused super accounts if they haven’t done so already.
This measure does not apply to SMSFs, but nevertheless could provide a valuable performance benchmark for trustees.
All of these measures in isolation are relatively small, but when used in conjunction with one another, will add up and potentially make a difference to someone’s capacity to rebuild the balance, and years of compounding interest, lost through the ERS scheme.
REBUILDING SUPER: AT A GLANCE
• Consolidate superannuation balances as having multiple accounts isn’t effective. Oft en when moving jobs, people start a new superannuation account and the balances of old super accounts could be eaten up by fees when contributions are no longer being deposited.
• Don’t pay too much in fees. Weigh up the fees charged by the current superannuation fund and compare them to those charged by similar funds.
• Make sure insurance cover is appropriate for your needs as the premiums are paid out of your contributions.
• Plan for career breaks, such as sabbaticals or parental leave. Consider spouse contributions and contribution splitting during career breaks and salary sacrifice later in your career to make up for missed contributions. The government’s five-year catch-up concessional contributions for those with super balances under $500,000 should be considered.
• Retirement can seem a long way off , but even though balances have been eroded as a result of the ERS scheme, it’s never too late to start taking action – the younger, the better!
