The Long-Term Cost of Accessing Super Early
Our Senior Wealth Adviser Dawn Thomas (aka The Fairy Godmother of Superannuation) was recently featured on Ausbiz’s The Advisory to discuss One Nation’s proposal to give Australians greater access to their super before retirement.
Under the scheme, eligible Australians who rent or pay a mortgage could choose to redirect three percentage points of their compulsory 12% superannuation contributions into their bank accounts for up to three years.
At a time when many households are feeling the pressure of rising living costs, the prospect of having more money available today might sound appealing. However, Dawn expressed her concern over the scheme, and cautioned that people need clear information about what they could be giving up in the future.
The hidden cost of accessing superannuation today
Dawn is worried that many Australians may not fully understand the long-term consequences of removing their money from super.
As both a financial adviser and a researcher in superannuation engagement, she’s seen how disconnected people can feel from funds they may not need for several decades.
“We’re not at the level, as a general public, with engagement around superannuation to really assess the impact of withdrawing money so early,” Dawn said.
The main issue is that when money is removed from super, the cost is not just the original amount. That money also loses the opportunity to generate investment returns over time – as well as returns on those returns.
This is the power of compounding, and the younger someone is when the money leaves their super, the greater the potential impact can be. A person in their 20s or 30s may have several decades of investment growth ahead of them. But once that opportunity is lost, it can be extremely difficult to recover.
Would paying down a mortgage make it worthwhile?
One argument in favour of the proposal is that people could use the additional money to reduce their mortgage and save interest.
While this may produce a financial benefit, Dawn explained that it needs to be weighed against the potential growth within super.
In one scenario she modelled, redirecting approximately $6,900 into a mortgage could result in around $20,000 in interest savings over the life of a 30-year loan. However, if that same amount remained invested in super for someone in their 30s, it could potentially grow to around $50,000 by retirement.
These figures will vary depending on factors including age, investment returns, inflation and mortgage interest rates – but they demonstrate why detailed modelling is essential.
What did we learn from COVID-19?
Australia has already seen what can happen when people are given early access to their retirement savings.
During the COVID-19 pandemic, approximately three million Australians accessed around $38 billion through the early release of superannuation scheme.
For many people, this provided genuine relief during a period of financial hardship and uncertainty. However, subsequent research also raised questions about how some of the money was used and whether everyone who accessed it understood the long-term consequences.
“COVID tells us a lot about people’s behaviour around that withdrawal, and what Australians are likely to do if they’re given a choice to be able to pull money out of superannuation,” Dawn says.
Data suggested that spending increased across several categories including gambling, and Dawn shared that she’s heard anecdotal reports of withdrawn super being used for purchases such as new cars and cosmetic surgery.
Super is not a short-term cost-of-living solution
Superannuation remains Australia’s most important long-term savings system.
Australians are living longer, which means their retirement savings may need to support them for longer too. At the same time, an ageing population is likely to place increasing pressure on government support systems.
As Dawn shares:
“There’s a book called The 100 Year Life, which explores the possibility that Western civilisations could reach a point where the Age Pension and other forms of social security may not exist at the level we know today. If we’re thinking about our future selves, we need to be prepared to provide for more of our own retirement.”
Using super to address current cost-of-living pressures creates a larger problem in the future, when individuals may have fewer opportunities to rebuild their savings and the wider community could bear more of the cost of supporting them.
Australians need the full picture
Dawn’s concern is whether people will be provided with enough clear, balanced information to make an informed choice.
As she shares: “I believe people can be trusted to make good decisions if they’ve got the right information in front of them, and I’m not sure that the right information is going to be in front of people – given what we know about this proposed policy currently.”
Watch Dawn’s full Ausbiz interview here.
If you’d like to understand whether your superannuation strategy is on track for the future you want, speak to us today.
Want to know more about superannuation? Read our articles What is Superannuation Really For? and Can a Super Decision Make You $100k Wealthier?