Withdrawing super early was a $5.4 billion mistake

It hasn’t taken too long to discover that last year’s emergency measures for individuals to withdraw up to $20,000 from superannuation to cover the COVID-19 pandemic has been one of the worst financial decisions anyone could have made.

The fantastic investment performance of the super funds since the pandemic now effectively means that those who took advantage of the Morrison Government offer to extract some of their super would have been much better off taking out a personal loan.

Since the withdrawal, the average balanced super fund return has been amazing – well into double figures and 2.2% in April alone, according to the latest Chant West figures.

The average return for the median growth fund for the 10 months of the 2020-21 financial year is a remarkable 14.7%, with some funds doing much better than that.

More than $41 billion now missing from retirement accounts

It is not hard to see the reason given the rise in local and offshore share markets since the depths of the pandemic, but it does highlight that by enabling the super withdrawals, the Federal Government has allowed $36.4 billion of super money to miss out on a return of $5.4 billion.

That is a big chunk of retirement savings – $41.7 billion by now and still rising – that simply won’t be there when a mainly younger group of those who withdrew leave the workforce.

Of course, that return doesn’t take into account the fact that many of those who withdrew up to their entire super balance used that money to pay for essentials such as food and rent at a time when there was great financial uncertainty.

Withdrawal “the worst loan in history’’

Research by the Labor-aligned think tank the McKell Institute found that the 3 million Australians who too advantage of the super withdrawal scheme have collectively lost $4.7 billion – a figure that has since risen further.

McKell Institute executive director Michael Buckland said effectively that made super withdrawal “the worst loan in history’’.

“It was worse than borrowing it from a payday lender. A personal or payday loan charges about 10% interest.”

Burden of pandemic shifted to those who could least afford it

He said effectively the government had moved the burden of dealing with the pandemic on to those who could least afford it and had failed to make use of the government’s access to cheap money.

“When the government provides support, it simply borrows, and on three-year bonds it is only paying 0.25%,” said Mr Buckland.

“So, the question is, ‘To fund welfare, do you have people lose 15 to 20% in a year, or do you pay 0.25%?’”

“The government sees it as a good thing, because it doesn’t add to their debt. But someone else is bearing that cost – in this case people in the form of smaller retirement balances.”

Not even paying down the mortgage made financial sense

Even using the withdrawn money to pay down the mortgage does not make a lot of sense, although it does reduce loan terms.

“Mortgage rates are now less than 3%, so if you chose that path, you have effectively saved yourself 3% and lost 20%,” Mr Buckland said.

What price peace of mind?

Of course, this doesn’t take account for the fact that many people may have been able to sleep better because they had access to extra cash at a time when things looked tough.

If they used the money to pay down credit card debt, they may even still be ahead if they can remain disciplined and not run up any further debts.

There is sometimes more to life than mathematics and taking a long-term loss to bridge a short-term need can make sense in terms of giving a form of security and peace of mind.

There are some strategies to restore super balances

As to how those who withdrew their super can restore their balances, there are a few strategies, although care needs to be taken to avoid adverse scrutiny from the Australian Tax Office.

Simply recontributing the earlier withdrawal could be problematic from a tax point of view and care needs to be taken not to breach the non-concessional contributions cap, although using the existing spouse and co-contribution strategies could generate a tax credit.

Upping weekly super payments by “sacrificing’’ some salary is a useful method, boosting the super balance over time.

Depending on the individual’s tax rate, the net amount of salary received each week will not fall by as much as is being contributed to super.

If a salary sacrifice is left in place for longer than required, it can also make up for the earnings that have been lost over time.

Hindsight is a wonderful thing and it already shows that using the emergency super withdrawal was not a great idea but there are ways to make up for that lost time and money.