Early release super destroys compound interest

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MEDIA RELEASE: Anyone taking advantage of the Federal Government’s Early Release Superannuation (ERS) scheme should take into account the extra time needed to rebuild their super balance, particularly if the Federal government delays the planned increase in the superannuation guarantee rate, says Andrew Yee, HLB Mann Judd Sydney director of superannuation. 

Under the ERS, Australians who have been adversely affected financially by COVID-19 may be able to access some of their superannuation early. Eligible citizens and permanent residents of Australia or New Zealand can apply to access up to $10,000 of their super in the 2020–21 financial year, with the payment not attracting any tax.

However according to Mr Yee, many have accessed the scheme without appreciating the advantages of compounding interest, and how long it will take to rebuild the balance required for a comfortable retirement. 

“Compounding is essentially interest on interest – and returns on returns – so the longer people have been in the workforce, the more time they’ve had to accrue compounding interest and increase their super balances. 

“Time in the market is so valuable, so for people in their 30s and 40s who have accessed the ERS scheme – particularly those in lower income brackets – there is a pressing need to think about how they’re planning to rebuild their super balance. For many, there’s not enough time in their working lives to get it back.

“If the Government does delay next year’s legislated increase in the compulsory superannuation guarantee – planned to rise from 9.5 percent to 10 percent – then this will make it even harder for people to start rebuilding their superannuation savings,” he said. 

Mr Yee said too many taxpayers consider superannuation a ‘set and forget’ strategy, without regarding themselves as an investor with a role to play.

“Unfortunately, this again applies to many lower income earners who are accessing the ERS scheme. They should ensure they are familiar with how super works in practice and, as an investor, the longer the time horizon the more time they have to take advantage of market ebbs and flows. 

“Investment returns have taken enough of a hit with COVID-19, so accessing a chunk of super will only exacerbate losses further. ERS recipients who now find themselves back at the drawing board need to act quickly to restore super balances,” he said. 

An estimated $25.3 billion has been withdrawn under the ERS scheme since its introduction, however Mr Yee said there are several strategies ERS recipients can use to maximise contributions, including: 

  • Make a concessional (before tax) contribution. Before tax contributions are payments put into your super fund from your pre-tax income – up to $25,000 can be contributed each year from employer contributions as well as salary sacrifice and member concessional contributions
  • Utilise unused before tax contributions cap over five years (assuming the super balance is under $500,000) – since 1 July 2018, people can accrue their unused before tax cap of $25,000 and carry it forward to future years. This means if people don’t use the full amount of contributions cap in a particular year, they can carry forward the unused cap amount and take advantage of it up to five years later
  • Make a non-concessional (after tax) contribution – up to $100,000 per annum or $300,000 brought forward over three years, can be contributed on an after-tax basis. The cap will be indexed in line with the before tax contribution caps
  • Consider a spousal super contribution – people can make voluntary contributions to their spouse’s super. If the spouse is on a low annual income, there may be a tax offset. These contributions count toward the after-tax cap
  • Take advantage of the government super co-contribution – low or middle-income earner who make a personal (after-tax) contribution to their super fund can also access the government co-contribution up to a maximum amount of $500.

“In addition, people who have accessed the ERS scheme should familiarise themselves with their super fund of choice, and carefully read the Product Disclosure Statement. Super savings can be rebuilt quicker by simply switching to a low-cost fund, or one that incorporates low administration and investment fees, and that adopts an appropriate investment strategy. 

“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,” said Mr Yee.