Time to address non-retirement super elements

Content Summary

Author: Richard Webb, Policy Advisor Financial Planning and Superannuation, CPA Australia

One of the most discussed elements of the federal government’s response to the pandemic is the COVID-19 superannuation early release scheme, allowing qualifying Australians to access up to $20,000 of their retirement savings in two tranches up to December 2020. As at the end of the financial year, $18.1 billion had been released from preservation, with an astonishing 2.4 million applications paid.

The spike in new applications made in the new financial year shows word has clearly got around, with the Australian Prudential Regulation Authority suggesting a number of applications for this financial year has already been received from Australians who received payment prior to July. However, this one-off opportunity, as it has been presented to Australians, may end up costing them more than that, with estimates suggesting that a $10,000 amount withdrawn by a 25-year-old is likely to cost them nearly $20,000 (in today’s dollars) at age 67.

Feedback from CPA Australia members suggests many Australians taking advantage of this ‘opportunity’ have done so without seeking appropriate financial advice. Apart from the many obvious problems associated with this approach, a key problem is once the money has been removed from the superannuation environment, it may be difficult for some to repair the damage done. Contribution caps, for example, do not change just because someone has removed part of their superannuation, nor do asset prices necessarily revert, meaning one may potentially be permanently out of pocket due to market rallies.

Never mind the ATO is aware many of the applications may have been made in error, meaning there may be a potential shock when a tax bill is received by individuals who believed this might have been a tax-free payment.

At the same time as this has been going on, the Retirement Income review has been underway, compiling a fact base regarding Australia’s retirement income system. One key issue, which CPA Australia noted in our submission to the review, is that the idea of retirement has itself not been defined by government. This means the infrastructure and resources used by Australians in order to plan for their retirement, including superannuation, are in danger of being subsumed beneath other ‘opportunities’.

Retirement income systems globally intersect with other policy areas occasionally, with facilities such as health insurance and housing often included in some countries’ retirement income systems. Non-retirement additions have differing levels of effectiveness, but generally have a cumulative effect of reducing the importance of retirement as the object of savings. These features also provide an additional pressure on the good investment returns Australians would expect from savings over decades.

Obviously, given the context of the sole purpose test, as well as the government’s policy to enshrine the objective of super within the context of income in retirement, any non-retirement features also communicate a mixed message. Given that the $3 trillion of savings in the super system, positioning it as a honeypot potentially adds to the confusion.

When the crisis of the pandemic passes, a number of measures will need to be put in place in order to rectify the damage caused to retirement savings due to this measure.

One of these may have to be an amnesty of sorts, possibly facilitated via targeted  increased contribution limits, to allow Australians who have drawn on their super to accelerate replenishing their retirement savings. Ideally this should be accompanied by a co-contribution scheme to ensure that the time value of money is appropriately factored into these additional amounts contributed.

Another initiative may allow for a temporarily higher total superannuation balance threshold (currently $500,000), allowing taxpayers who have accessed their superannuation to have an increased opportunity to use the carry forward of unused concession contributions, without breaching their contribution caps.

But this still leaves the question about support for Australians during crises such as pandemics – and other non-retirement issues – addressed: Is this still part of what is considered retirement? The issue of whether superannuation should be addressed as part of a holistic coordinated approach to Australia’s contingency planning framework.