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As the Federal Government moves to reduce the impacts of COVID-19, Australians who are feeling the brunt of the economic downturn have the option to access their superannuation early. With this announcement, the liquidity position of many superannuation funds has been put under the microscope as the value of their holdings and underlying assets drop due to the current market environment.
If you are watching the value of your super balance decline and considering withdrawing some of your super, it is important to consider the alternatives and the long-term impact first. While accessing super might be a necessary last resort for those with no alternative, tapping into your nest egg now could leave you worse off in retirement.
Australia’s superannuation system was established to make sure we all have enough money for our retirement. With every pay cheque, our employers are required to pay 9.5% of our wage into our superannuation fund and, except under exceptional circumstances, we are not allowed to access those funds until we retire. This is how super normally works. However, we are not living in normal times.
While the COVID-19 pandemic is primarily a health crisis, it has also evolved into a global economic crisis. The introduction of social distancing rules and restrictions on non-essential services to stem the spread of the virus have caused many people to lose work and has effectively shut down large parts of the economy.
In order to assist individuals and businesses through the economic crisis, the Australian Government introduced a raft of financial assistance measures throughout March and April. These measures included a policy to allow people facing financial hardship due to COVID-19 to access up to $10,000 of their super balance this financial year, and another $10,000 in the next financial year (from 1 July 2020).
To be eligible for early access to their super, applicants need to demonstrate they are unemployed or eligible for support payments including the JobSeeker payment, Youth Allowance, Parenting Payment, Special Benefit or Farm Household Allowance. People who have had their working hours reduced by more than 20% due to the coronavirus, or sole traders who have had their turnover fall by a similar amount, are also eligible.1
More than a million Australians are expected to apply for access to their superannuation under the scheme. The unusually large amount of people withdrawing super in such a short period of time creates a challenge for super funds who are required to find the cash to meet these requests. The Australian Prudential Regulation Authority (APRA) has provided guidance to super funds that payment should be made to members within five business days. As a result of these requirements, some superannuation funds have been increasing the amount of cash they have available to meet requests for early access to super.2
While the scheme is a large divergence from the way super was designed to work and the way super funds were managed, with people normally unable to access their super until they retire or turn 65, this is something that superannuation funds are now expected to be prepared for. Super funds are required by law to ensure they have adequate cash allocations at all times, including enough liquidity during extreme events such as the global financial crisis or the current COVID-19 crisis.
As the impact of COVID-19 continues to play out in the economy, it is likely that more people will take the opportunity to access their super early. Reserve Bank of Australia Governor Philip Lowe has predicted unemployment will reach 10%, up from the latest March ABS figure of 5.2%, and hours worked could be down 20% by the second half of the year.3
When announcing the scheme, Prime Minister Scott Morrison said he expected up to $27 billion to be withdrawn, which was less than 1% of a system worth $3 trillion. Following the announcement, APRA surveyed super funds to see if they had enough cash on hand to cover the payouts. At the time, the regulator found that the early release of super amounts to $20,000 would not have a significant impact on the industry overall.
Concerns about the global economic impact of the COVID-19 pandemic have shaken stock and bond markets. The Australian share market fell 21% between the end of January and the end of April and US stocks retreated more than 10% over the same period. Off the back of all-time highs in February, the market entered bear territory which significantly impacted superannuation balances.
Many funds have also looked to revalue their holdings of illiquid assets, such as airports, private equity and property. In a move to present a more accurate value in the current environment, the out-of-cycle revaluations have led to write-downs on parts of their portfolios.
On average, funds have so far reduced the value of infrastructure and property assets by 5 to 10%.
While this is less than the fall in equity markets, this is still significant given these assets are valued in the billions. Future write-downs are possible as the full impact from government restrictions globally and factors such as tollway traffic volumes and air travel become known.5
The impact of the crisis on financial markets has been reflected in the balance of superannuation members. Figures from super ratings agency Chant West show the average balanced fund, where most Australians invest, has lost 10% since the start of the year.6 While declining super balances aren’t good for members, Chant West noted that the diversification of super portfolios meant the damage to super balance was far more contained than global shares.
While this is a significant fall in value, it is important to remember that it represents a relatively brief moment in what is a long-term investment. Superannuation members are ordinarily investing for decades, and while there may be a current fall on paper, the only time the loss is crystallised is if you sell out or retire while the market is down.
While some individuals will have no choice but to assess their situation due to the difficult financial circumstances they find themselves in, it is important to understand the trade-off between accessing cash now and leaving it to grow for your retirement. Early access to super will have three main consequences for your super balance at retirement.
By accessing funds early, you will be selling during a period of unprecedented uncertainty and volatility, meaning you are locking in the losses – possibly near the bottom of the market. Just as you wouldn’t want to sell your house when the market is unusually weak, it doesn’t make financial sense to cash out your superannuation holdings just after prices have fallen steeply, unless it is a matter of last resort. This also applies to your other investments outside of superannuation.
After every market downturn, there is a rebound. If you withdraw super now, you will miss out on the rebound that will inevitably come. SuperRatings has calculated that $100,000 held in a balanced fund at the bottom of the GFC is up by about 121% today.7
Even without market gains, money invested today will grow significantly over the years before retirement thanks to compound interest.
Compound interest is interest paid on the initial principal (your starting super balance) as well as the accumulated interest earned over time. The earlier, and more you invest, the better because the return grows exponentially the longer the time frame.
The Conexus Institute, Actuaries Institute Australia and Super Consumers Australia have estimated the impact on retirement savings of people withdrawing via the early access scheme. They found that taking $20,000 out of a 50-year-old’s super account now would forego around $30,000 in future benefits, assuming they retire at age 67 and excluding any impact on the age pension.8
1. Australian Government Taxation Office, COVID-19 early release of super - https://www.ato.gov.au/Individuals/Super/In-detail/Withdrawing-and-using-your-super/COVID-19-early-release-of-super/
2. AustralianSuper, Understanding liquidity and your super - https://www.australiansuper.com/investments/investment-articles/2020/04/understandingliquidity-and-your-super
3. Speech by Reserve Bank of Australia Governor Philip Lowe, An Economic and Financial Update, 21 April 2020 - https://www.rba.gov.au/speeches/2020/spgov-2020-04-21.html
5. Sarah Jones, Investment Magazine, More pain ahead as funds write down assets, 22 April 2020 - https://www.investmentmagazine.com.au/2020/04/more-pain-ahead-as-fundswritedown-assets/
6. Rod Myer, The New Daily, Superannuation is holding up in the throes of the coronavirus crisis -https://thenewdaily.com.au/finance/superannuation/2020/04/26/coronavirussuperannuation-impact
7. SuperGuide, Coronavirus and super: What the experts say - https://www.superguide.com.au/retirementplanning/coronavirus-and-super-experts