Almost everyone reading this article will have a superannuation account, and probably with a fair bit of cash in it, too. Since the introduction of the superannuation guarantee in 1992, it has been mandatory that almost all Australian workers quarantine a small portion of their pay packets within a superannuation fund.
This 'small portion' has actually grown into a sizeable one over time. Upon the super system's debut in the 1990s, it was initially set to 3%. But as it stands today, the superannuation guarantee sits at 11% and will rise to 11.5% come 1 July next month.
What is superannuation?
Our superannuation scheme represents a societal grand bargain of sorts. Individual Australians would part with full control over this portion of 'their' paycheques in exchange for lucrative tax perks within the super system and the promise of a more comfortable retirement that is less reliant on the Federal Government's Age Pension.
However, this superannuation bargain has been tested in recent years. There was the pandemic-era decision to allow Australians to withdraw up to $20,000 of their super during the pandemic. That was a decision many found questionable at the time.
There has also been significant debate revolving around the idea that first-home buyers should be able to access their super funds to help purchase their first home.
With the COVID pandemic now in the rearview mirror, most Australians might assume that the super system has gone back to its roots, and is only there to provide a pathway for a comfortable retirement. However, this might not be the case.
Retirement fund or dental account?
Most of the time, superannuation is not allowed to be withdrawn for everyday use. However, there are provisions in place that permit early withdrawals on compassionate grounds. Those might include expected medical expenses or economic or domestic hardship.
But according to reporting in the Australian Financial Review (AFR) last month, it seems that many Australians are exploiting these provisions for illegal access to superannuation.
According to the report, the Australian Taxation Office (ATO) estimates that the 2020 financial year saw $381 million in unauthorised superannuation funds withdrawn from self-managed super funds (SMSFs). Over FY2021, it was $256 million.
Some of the reasons the ATO gave for these withdrawals were a lack of knowledge about the system, financial stress and personal issues. That's on top of a 'It's my money and I will do what I like with it' attitude.
Between FY2019 and FY2023, the applications for early super withdrawals reportedly increased 40%. Applications for early withdrawal for factors like mortgage stress, disability and palliative care did fall over the period. But they were more than offset by a rise in those seeking early super access for medical expenses. These included everything from dental work to weight loss procedures.
We're not here to judge individual financial circumstances. However, there are a few reasons why withdrawing from your super should be a move of absolute last report for anyone considering it.
3 reasons why you should leave your super alone
Less super means a poorer retirement
Firstly and most importantly, you'll hobble your chances of a comfortable retirement. Superannuation has been designed as our primary route to a comfortable retirement. The Age Pension is supposed to serve only as a safety net. If you reach retirement age with little to no super, you'll have to rely on the incontrovertibly modest Age Pension for the rest of your life.
You'll lose any autonomy you might have had over your retirement had you not withdrawn any funds. Not to mention being entirely reliant on what the Government decides to pay you. You'll also be hoping against hope every Budget that the Government can continue to afford to pay your Pension.
Giving up compound interest
Another reason super should be thought of as a last resort is the compounding nature of this investment. When your money goes into your super fund, it is typically invested in assets like ASX shares. These investments compound over time, ensuring that early contributions end up providing the bulk of your wealth once you reach retirement age.
Let's say a 25-year-old withdrew $10,000 during the pandemic. This could end up costing them more than $180,000 in super balance by the time they reach the retirement age of 67. That's assuming a modest 7% per annum return. This loss could stretch to nearly $400,000 if they went the whole hog and took out $20,000.
It doesn't matter the reason for the withdrawal. Any money you take out of super will cost you dearly down the track.
Raiding your superannuation increases the burden on all Australians
The third reason is a selfless one, but worthy of discussion nonetheless. The provision of the Age Pension is a costly program, one of the single costliest items in the Budget.
Now most Australians don't mind paying their taxes to ensure that all Australians can have a dignified retirement. But the whole point of super is to relieve taxpayers of at least some of the burden of paying for others' retirements.
If you raid your super early, you will increase the financial burden on all other taxpayers if you then have to claim the Pension because your super balance isn't enough to cover your own bills. Something to keep in mind if you ever find yourself thinking about dipping into your superannuation savings.
