Podcast: Superannuation, and its relevance during COVID-19

Nadine:

Good morning, my name is Nadine Udorovic and I’m a partner at Nicholes Family Lawyers.  I’m joined today by Kate Bell, Senior Associate, to discuss the availability of early access to Superannuation during COVID-19 and the associated risks and benefits of this scheme.  While superannuation is meant to assist with retirement, the Australian government has recognised that the significant financial implications of COVID-19 has meant that for those who are most affected, there may be an urgent need to access these funds currently.

As of 1 July 2020, people facing financial stress as a result of the pandemic, are able once again to access their superannuation account balance early.  The new accessibility brought about by these measures may seem appealing to those who are looking for a quick supply of money to improve their hampered financial position brought about by the pandemic and the associated restrictions on work and business. However, today we are joined by Kirsty McCormack, Operations Manager at Morrows Private Wealth to discuss the viability of this early access scheme, its benefits and potential risks.  Morrows Private Wealth is a premier private wealth management and professional services firm which assists clients to manage wealth, assets and their future.  Morrows provides services in relation to tax and business advisory, superannuation, business technology and lending solutions. Thank you Kirsty, for joining us today, to share your insights into this area and the accessibility of superannuation during this time.  Welcome!

Kirsty:

Thank you, Nadine and Kate, for having me today.

Kate:

To start, Kirsty, what is superannuation and how did it originate?

Kirsty:

A good question and one in which some people don’t have a very good background on.  Compulsory superannuation was introduced in the early 90s as a forced savings plan and the idea behind it was to take pressure off the government Aged Pension, knowing that the baby boomer generation was going to become a retirement-aged cohort, so we have had this system in place for over 30 years and it has grown to an almost $3 trillion industry.  When we relate that back to Family Law it often  represents a large portion of people’s wealth along with their house.

Nadine:

That’s exactly right, Kirsty. So what are the benefits of superannuation, particularly in relation to income and to Capital Gains Tax?

Kirsty:

Another good question, so when people first come to us, they know that super is a good thing to have but they are not sure why; it comes down to the fact that it’s a very tax efficient form of tax savings so if we compare it to personal tax rates where you have a marginal tax rate system and the highest tax rate is 47%, once you hit $180,000 worth of income, that’s including the Medicare levy, and if we compare that to the super system, income tax in super is at a flat 15% and capital gains at 10% for assets held more than 12 months, and that is in the accumulation phase.  When we get to the retirement phase it becomes even more attractive, where income tax and capital gains is at zero per cent and the pension is also drawn out tax free to the person’s own name.

The down-side is that you cannot access super until your preservation age and that is between the ages of 55 to 60, depending on your date of birth and the amount that you can access depends on when you stopped working, as well.  There are also limits on the amount that you can contribute to super and the amount that you can get into retirement phase, and that is really to limit the benefits under the tax system.

Nadine:

Sure, but it’s interesting. The tax brackets which you just went through, there is such a big difference there, it’s huge if you look at it.

Kate:

True.  A topical issue during COVID, Kirsty, is that many people have been seeking the ability to release some of their super, due to financial hardship, what are the eligibility requirements in order to access your superannuation early?

Kirsty:

For COVID, the government introduced the early release scheme which is on top of other permanent early release schemes such as terminal medical conditions, incapacity, severe financial hardship, so this is a temporary measure which allows people to draw out tax-free up to $10,000 if they have been adversely affected by COVID, so the eligibility criteria is that you have to be unemployed or receiving an eligible government assistance like Job-Keeper Youth Allowance, those sorts of payments or on or after the 1^st January 2020, you have to have been made redundant or had your hours reduced by 20% or more, and for sole traders, you could have a reduction in turnover of 20% or more. The applications for this financial year close on 31 December 2020.  Applications are done through the MyGov website and the Tax Office website has details for making those applications.

Nadine:

Kirsty, is it a one-off application to receive the up to $10,000 tax-free component or can eligible persons access that more than once?

Kirsty:

It is a one-off payment so you could have had access last financial year once-off and again this financial year.

Nadine:

So what is the relationship between superannuation and forms of insurance such as death, disability and income insurance and for example, how would an early withdrawal affect these?

Kirsty:

It is very common to have insurance through your superannuation fund and what happens in these times is typically, people get their super statement and they see all this money coming out and they say that they don’t really want to be paying insurance premiums any more, so really what that comes down to is that it is an individual situation: how much insurance do you need to have? Questions to ask are: is this the right amount of cover for me? Often people have automatic insurance cover under an employer plan and we often find this is not enough cover for what they need, but that comes back to what the purpose of the cover is?  Is it to reduce debt if you pass away or have a disability?  Or is it to fund future education costs for your kids?

So really you need to understand what your insurance is for and whether it is the right amount of cover before you start questioning to try to reduce the costs of it.  The other question that we need to be mindful of is: should that insurance be held within super or outside of super and there are some definite advantages and disadvantages of holding insurance through super – one advantage being that premiums are funded through super and you don’t have to find it from your personal cash flow; another is that it is tax deductible, the premiums are tax deductible to the super fund.  The downside of that is that on a claim there are disadvantages, so for death, you really need to work that in with your estate planning because there may be some tax consequences of that and I have seen where people want to leave assets outside of super to their new partner and their super to adult kids and that does not make sense from a tax point of view.

So it is really getting that estate planning right.  Another area is where people have got income protection insurance through their super fund which really is a backup plan for if you can’t go back to work, either temporarily or permanently, so it is a really important type of cover. One of the issues is that it is a two-year benefit period in super whereas outside of super it could be up to age 65 or 70 depending on your policy and you are potentially looking at a lower tax deduction for premiums inside super, with 15% versus 47%.

Coming back to your question, how does early release of super affect insurance policies, well, what we find is that people who are taking money out tend to have a lower balance, so if you are drawing your money out, you need to make sure that you have enough money left in your super account to cover the cost of the insurance premiums and if you have lost your job, then you don’t have those contributions coming in that would top up your super.  So if you don’t pay your premiums, your insurance cover will eventually be cancelled which may lead to you having to re-apply for cover which could involve medical tests and there is no guarantee that you will get the cover again.

Kate:

Would you look to your super statement if people are interested in knowing about that?

Kirsty:

Yes, for your super statement, you can look online, or call your super fund; if you have a self-managed super fund, then it’s getting into contact with your advisor or with the insurance company.

Nadine:

We typically don’t see a lot with the income protection insurance, we probably see more around the death and disability when we are looking at them for clients, so that is interesting about the income protection insurance, in terms of the two-year benefit versus if you are doing it separately, the long-term impacts and benefits.

Kirsty:

Yes, it is not a standard cover in some cases, death and disability is more standard, the income protection is more of an option, but I really think it is an under-rated, under-sold policy.

Nadine:

It is so important to read the fine print in the super statements, there is always so much information in them.

Kate:

I was amazed before when you mentioned that super is a three trillion dollar industry, that is quite extraordinary! Can you speak to the effects of COVID-19 on the superannuation industry and from a local perspective?

Kirsty:

Yes, I guess with the early release of super we have seen a mass withdrawal of super benefits.  Around 4.4 million people have withdrawn more than $34 billion which is a very big impact on the industry, but it has also happened at a time when investment markets were down so not only did people lose money on their investments but they have also got the double impact of withdrawing it out, so there is no chance of re-couping that capital loss. But apart from the early scheme effects, I think everybody across the board would have seen their super balances drop and so I just want to go through a little bit about what actually happened with a super balance. In March/April this year when COVID first hit, all traditional markets sold off, so shares, property, credit markets, even government bonds, for a period, fell in value.  And that resulted in the sharpest sell-off in investment market history. But the government and central banks stepped in and acted really quickly with economic stimulus and that resulted in the fastest recovery in history as well, so that’s really what happened in investment markets

Although we are in a recovery phase, we are not back to the same levels we were back in March but we are seeing that share markets are still expensive.  But at the same time, the economy is on a form of life support and is being propped up by government and central bank stimulus and there is a lot of uncertainty in economic conditions, so it is really showing a disconnect between what is happening in Wall Street and what is happening in High Street. By that I mean that investment markets are over-priced and share markets are going higher and higher whereas if you take a walk down to your local shopping strip you have got businesses, especially in Melbourne which are closed down, whether temporarily or not, but the government stimulus in printing money helps the economy but it doesn’t get people jobs and it doesn’t stop businesses collapsing after a global shut-down. So we are in a position where we have got strong investment markets and a weak economy and that can happen for a period of time.  How quickly we stay in this position really does comes back to how quickly we find a vaccine and getting back to normal in some form. Really the challenge in this market where we have got almost zero percent interest rates, an expensive share market, an uncertain property market in terms of office buildings and retail spaces after COVID – really what is going to happen is that super funds will need to look at where they can find value for their members.

Nadine:

That is so true. Now for the million-dollar question that all our listeners will want to know: can you tell us how much super is enough for a comfortable retirement – is it possible to quantify this amount?  I’d love to know!

Kirsty:

This is a question that we get asked quite a lot.  It doesn’t matter how much money people have, they always worry that they won’t have enough.  And there is no quick answer to this question at all, because there are so many factors that come into play.  These include life-style factors, so how much are you spending each day and how often do you go on holidays and do you go overseas and do you stay in 5-star hotels, and how much shopping do you do?  Also, do you want to leave money to your kids as well, as an inheritance, and what level of risk are you comfortable taking on your investments and what rate of return can you achieve. There are so many factors that go into that – it is really difficult to predict.  However there are calculators that let you model that;  for instance, I know that the government MoneySmart website has a calculator or if you have a financial advisor, the financial advisor could do some calculations to find that out.  In our experience, people tend to be more active in their early years of their retirement, spending money more on entertainment and travel and later on, in retirement, the costs shift to more medical spending and potentially aged-care costs.

But that is not the normal course, it may change, depending on the individual. There are industry figures put out, which the government does publish. As a rule of thumb, you need two-thirds or 67% of your pre-retirement income, and that ties back to an individual basis and they do some calculations saying that for a couple to have a comfortable lifestyle,  they will need around $62,000 per year and to achieve that, they will need a lump sum of $640,000 to generate that $62,000 a year, plus a bit of aged pension to supplement that. So there are some figures – very rough figures but it does come back to an individual basis.

Nadine:

That’s a good tip about that calculator.

Kate:

Yes and I’ve just checked online.  If people want to go onto it and want to find that website, they can go to Moneysmart.com.au which should be easy to access.  Kirsty, thank you, and overall, do you think the early access measure is a viable option fiscally for Australians moving forward once the final impact of the COVID pandemic has dissipated – what is your view on that?

Kirsty:

Again that comes back to an individual basis. The effects of compounding returns mean that drawing money from super now does have an impact on future balances. So for example, a 35-year-old with a starting balance now of $58,000, and if they take out $10,000, that could make a difference of around $26,000 in retirement, just based on some estimates within the industry so it really does come back to an individual situation and whether that person can build up their super again. It depends on job prospects, and for women, how much time they will have outside of the workforce.  So there are a lot of individual impacts on that, but overall what I think in the economy and the government, it might have a longer-term impact on the aged pension.

Kate:

I think that is a really interesting point you make about it often affecting women, because we often dip in and out of the workforce and sometimes you can end up with clients in three or four different superannuation funds with several employers because we have had interrupted career paths.

Kirsty:

And in those situations it is important to get together and find out what fees you are paying and what insurance you have and get a plan together for your super balance.

Nadine:

Thank you very much, Kirsty, that was very insightful, and I’m sure our listeners have learnt a lot today about superannuation. I myself have certainly picked up a number of good tips and some really interesting facts and figures that you have given us as well.  So thank you so much for giving up your time today to chat with Kate and me.

Useful Links:

Morrows Private Wealth: 03 9690 5700 https://www.morrows.com.au/ 

Disclaimer: Nicholes Family Lawyers intends the information provided in this podcast as general information only, please contact Nicholes Family lawyers if you require specific information and advise in relation to any family law matter.