Is “robbing Peter to pay Paul”, right for your future?
SMSF

Is “robbing Peter to pay Paul”, right for your future?

How do I rob Peter to pay Paul?Article by Myles Martin, MB+M

 

Debate raged last week around the potential use for First Home Buyers to dip into their superannuation, put forward by Treasurer Joe Hockey, as a means to fix Australia’s housing affordability issues. This debate, putting political preferences aside, got me thinking about whether this was a good, bad or indifferent proposal to help young home buyers get a piece of the Australian dream: “owning their own Home”.

 

My first question was:

 

How much super would a first home buyer be able to draw?

This question got me looking for answers which provided me with some interesting facts. The average 30 year old male and female, which this policy would be targeting, currently have an average super balance of $22,239 for males and $20,177 for females (ASFA Retirement standards), So, looking at these balances, the average 30 year old will have around $15000-18,000 (allowing for minimum balance requirements) to use on a house deposit.

 

This led me to my second question …

Will this deposit on property, from super, be enough to make a sizable difference on housing affordability?

Using the Melbourne and Sydney median house prices of $699,000 for Melbourne in December Quarter (REIV) and Sydney $811,837 (Australian Property Monitors Quarterly House Price Reports July 2014) the available funds from super would only provide a 2.36% and 2.03% deposits respectively. Therefore implementing this proposal would have very little impact on reducing the affordability of mortgages, while also potentially driving up property prices and housing affordability, the one thing this proposal was set up to ease. This led me to the next question…

How will the withdrawal of super affect the long term retirement benefits of the younger generations?

In using the superannuation as a short term fix, it gets away from what superannuation was setup to do:

  • “provide an adequate level of retirement income
  • relieve pressure on the Age Pension
  • increase national savings, creating a pool of patient capital to be invested as decided by fiduciary trustees.”

as listed on Australian Government Treasury website;

While the SIS Act the act governing Superannution rules and regulations summarises Superannuation though the Sole Purpose test as follows;

“Sole purpose test is a test that ensures a superannuation fund is maintained for the purpose of providing benefits to its members upon their retirement (or attainment of a certain age), or for beneficiaries if a member dies”

These two sources demonstrate the main reason why we have a superannuation system in place, to help fund our future retirement and reduce government expenditure (our taxes) on social security.

Through withdrawing a lump sum of funds from your super at an early age you are sacrificing your ability to build long term growth and are investing solely in property. Essentially, your retirement funds are inextricably tied to the value of your property and your ability to access that equity when you retire. This was highlighted in recent comments by former Treasurer and Prime Minister, Paul Keating.

“Allowing first home buyers to access their superannuation to buy property before the preservation age would destroy universal retirement savings at its core … It is the earnings on the earnings, plus new weekly capital commitments, that allow superannuation accumulations to roughly double every seven to eight years. Such growth in the asset base could not happen if people were permitted to take funds for convenience, thereby diminishing the asset pool and its capacity to compound.”

As stated by Paul Keating, it is the benefit of compounding earnings that helps build our retirement funds and any withdrawal to this pool of investments will impact the long term investment balance and long term wealth for retirees in the future.

After looking at superannuation as a retirement vehicle and the pitfalls of using super for first home buyers, the question turns to what can you do to make the most of your super?

Here I have listed some simple tips to help ensure that your super is ok?

Consolidate multiple superannuation accounts

Multiple superannuation accounts leads to multiple fees and insurance costs that can erode superannuation funds, especially if you have old accounts no longer receiving contributions. However, it is important to review insurances that may be attached to super, as some benefits will be lost when rolling over funds.

Review underlying investments on superannuation accounts.

Reviewing underlying superannuation investments will ensure the appropriate level of risk and time frames.

Review superannuation account costs

Review what fund you are in and whether it is appropriate for your situation. Always remember that the cheapest does not always mean best, it is important to look a the underlying investments and features together when reviewing costs.

Review Insurance cover held inside of your superannuation account

Reviewing current insurance can help reduce costs, while also highlight whether you are under or over insured for your current position.

Make extra contributions into super

Making extra contributions into super helps build your asset pool and the compounding effect of investment returns over the long term. Contributions made pre-tax will save you tax and also have the added benefit of being deducted before you can spend it (forced savings).

These tips are a general advice only and may not be appropriate for your own personal situation. Should you require personalised advice on any of these areas please contact one of MB+M’s superannuation specialists on 5831 1233.