Early access to super is rising at alarming rates, and not always for the right reasons.

In this episode, Mark and Shani dig into the sharp increase in compassionate-release applications, the rise of predatory dental/cosmetic advertising, and why taking money out of super early can quietly destroy your retirement savings.

They break down how early release works, who qualifies, and why even a $20,000 withdrawal could mean $93,000 less at retirement.

Plus, they discuss distrust in the super system, younger Australians opting out of contributions, predatory medical schemes, and the behavioural traps causing long-term damage.

You can find the full article here.

You can find the transcript for the episode below:

Shani Jayamanne: Invest Your Way is a different kind of book about money. We want it to be a trusted resource for investors who have graduated from Investing 101. For investors who know what a share is and an ETF is, but are struggling to put it all together to get onto the pathway to financial independence.

Mark LaMonica: Too much financial commentary focuses on investments rather than on the people investing. We believe investors are hungry for a new perspective. The investors we talk to tell us that they are tired of aspirational messages that lack the practical steps to put a plan into action. They don’t want bewildering and unrelatable jargon and complexity. They want the focus to be on the only thing that truly matters, creating a better life for themselves and their loved ones.

Jayamanne: Invest Your Way is a guide to successful investing with actionable insights and practical applications. You’re able to purchase the book through the links in the episode notes and at major bookstores or request a copy through your local library.

Welcome to another episode of Investing Compass. Before we begin, a quick note that the information contained in this podcast is general in nature. It does not take into consideration your personal situation, circumstances or needs.

LaMonica: We need to get through this quickly because you’re very tired.

Jayamanne: I am. I haven’t slept for two days.

LaMonica: And not because you’re doing anything fun. Priscilla has been ill.

Jayamanne: Priscilla is ill. We redid the garden recently, like a little spring clean, and we think he ate a snail, escargot.

LaMonica: Yes, very French of them. I don’t know if it’s in your garden or at the Clock Hotel.

Jayamanne: At the Clock Hotel. Oh, yes. They serve escargot now.

LaMonica: For some unknown reason. I’m yet to see anybody order escargot at the Clock.

Jayamanne: I mean, Mark, you live in Surry Hills. What did you expect?

LaMonica: Wow. Okay. Well, not all of us can live in Redford. But anyway, Priscilla has been up a couple of nights, hopefully on the mend.

Jayamanne: Hopefully on the mend.

LaMonica: But yeah, we’ll get through this quickly because you’re going to go home after this and take care of him. At least that’s what you’ve told the team. Reality, I believe a nap will probably be in the future. But anyway, we’re going to talk about super today, Shani.

Jayamanne: Which people usually like. It casts a wide net because most of our listeners do have super.

LaMonica: They do. But I think that most of our listeners and viewers also are very engaged with their super. We’re going to talk a little bit about a few new developments and trends in the super space that we’ve seen that we think are potentially concerning for people.

Jayamanne: So, data from the ATO shows that the number of individuals applying for compassionate release of super has increased from 39,000 in the 2020 financial year to nearly 69,000 in the 2024 financial year.

LaMonica: And the ways that you can access your super before your preservation age, which for most of us is 60 years old. But the ways you can access it before that age is limited. And most applications for early release of super are for medical expenses.

Jayamanne: So, 71,900 of the 90,700 applications submitted for that 2024 financial year were submitted for medical treatment or travel to obtain a medical treatment. And we want to look into why there is such a large increase in compassionate release for medical treatment. But first, I think it’s important to look at whether the mindset about super has shifted.

LaMonica: So, we can go back and look at why super was initially established, and that was just for retirement savings. And the intention was to take the burden off of the pension system. It was to make Aussies be able to self-fund their own retirements. And lately, we have been given a lot of mixed messages from the government by changes in government policy. There’s policies that allow first-time home buyers to pull out funds. There were policies during COVID that allowed the early release of super during the pandemic, which was mostly spent on pizza and gambling. But we have been getting a lot of mixed messages.

Jayamanne: Yeah. And this is particularly objectionable because more than 2.5 million Aussies took the Morrison government up on the offer. So over $38 billion was drained from super accounts. And those that did access their super reduced their balance by 51%.

LaMonica: And if you dig into the data a little bit, especially when we look at the limits on withdrawals and the percent decrease in balances, it becomes obvious that it was mostly younger Australians or those that were self-employed who took part in this early release program. Participants took what they could as 75% withdrew the maximum amount available.

Jayamanne: And you know, as Mark said, this policy was colloquially known as the $120,000 pizza, referring to the fact that a large amount of the money was spent on takeaway food. And the amount spent on takeaway food and gambling and other popular use for the money will result on average of $120,000 less in individuals accounts at retirement.

LaMonica: And I think one thing that happened – we think one thing that’s happened is because of these early release schemes, there has been increased visibility that money can be taken out of super. So, most people are disengaged with their super. And according to research from Australian Retirement Trust, nearly a quarter of Australians haven’t checked their balance in the last 12 months. More Australians learn from the early release scheme that super can improve their lives, not in the future, but today.

Jayamanne: Although improve their lives is objectionable because of what it was spent on.

LaMonica: Yeah, especially given the quality of pizza in this country. So, let’s move back to today. And I’m going to get in trouble for that pizza crack. Last time I said something negative about pizza in Australia…

Jayamanne: You got in trouble – and burgers.

LaMonica: Yeah. Except for, of course, the best burger in Sydney.

Jayamanne: But good pizza, Westwood in Newtown, and you like Bella Brutta.

LaMonica: I do. Westwood is impossible to get into. I mean, you have to show up and sign up to get takeaway.

Jayamanne: Yeah.

LaMonica: But anyway, we’re going to talk about what’s happening today and not in the pizza and burger scene in Sydney. So, Shani, you wrote an article on this. So, could you run through why there’s been this spike in medical treatment claims and the granting of release of super on compassionate grounds?

Jayamanne: Yeah. So, I can start with myself. So, I’ve been served ads on social media multiple times from companies promoting early release. And the message is that early release is possible and guidance and assistance are offered to obtain it. And the ad stop just short of encouraging Aussies, but the implication is clear. And most of the ads that I’m getting are for cosmetic dental treatments.

LaMonica: Wow.

Jayamanne: I know.

LaMonica: I mean, those are much better than the medical ads I’m served. So, you should be happy about that.

Jayamanne: But I think the line that needs to be crossed to consider these practices predatory is arbitrary. And I believe they’ve met that standard. The incentive is there as the companies benefit from the services individuals spend the money on. For example, another medical treatment that is considered is hair loss treatment. So, a hair loss treatment center gains a client from someone who can only afford the treatment if they use funds from their super. And there’s also third-party companies affiliated with medical services that facilitate release and promise a 100% success rate for applicants.

LaMonica: You’re supposed to go to Turkey.

Jayamanne: For hair loss transplants?

LaMonica: Yes. I don’t know why.

Jayamanne: Is that from first-hand experience or…?

LaMonica: That is not from first-hand experience.

Jayamanne: But I’m not the only one that’s concerned with what’s happening. In a press release, the Super Members Council or the SMC stated, we’re alarmed by a growing trend of Australians withdrawing retirement savings early to fund treatments beyond the original intent of compassionate access provisions, which we envisage are only for rare life-saving circumstances. And they called for the government and regulators to shut down the companies offering non-essential medical or dental treatments. And the SMC also notes their concerns with the methods used by these companies. And not only are they targeting consumers, but they’re also preparing inaccurate medical reports to increase the chance of release on compassionate grounds.

And analysis from the SMC shows that an individual who withdraws $20,000 from their super at 30 to access these funds will have $93,000 less in retirement. So, my intention with this article was not really to vilify people who are in legitimate need. It’s to educate people on the implications of early release to fund non-essential spending.

LaMonica: What about vilifying dentists and hair transplant people?

Jayamanne: I’m happy to vilify those that are looking to get access to superannuation funds.

LaMonica: Slowly over time, we are alienating more and more groups. So now we can add…

Jayamanne: First it was real estate agents. It was brokers.

LaMonica: And now dentists.

Jayamanne: Yes.

LaMonica: All right. Well, we’re in trouble. If anyone still listening to this…

Jayamanne: Yes.

LaMonica: We can go through the actual eligibility criteria for early release of super and see how it’s possible that all these people are actually getting early release. So, there’s several legitimate reasons why individuals can access their super early. But the provisions that we have are really there to help people that are in dire need. So, the first is compassionate grounds. And that includes medical treatment for you or a dependent, preventing foreclosure or forced sale of your home, modifications to your home or a vehicle to accommodate you or your dependent’s special needs arising from a severe disability. Then there’s access due to a terminal medical condition, severe financial hardship, temporary or permanent incapacity and if your balance is less than $200.

Jayamanne: And I used to see these claims come through when I worked at a super fund. So, the burden of proof for financial hardship claims is really, really high. You have to be on government support for six months and provide an itemized budget. The others are awful situations that completely justify accessing the funds and are relatively easy to prove. And compassionate grounds is really the way in to access non-immediate treatments.\

LaMonica: And what we’re trying to say here or what you’re trying to say, just so maybe I don’t alienate everybody, is that Aussies who are considering withdrawing funds from their superannuation should go into that decision with both eyes open. We saw from the early release scheme that there is a dismissal from a cohort of Australians about the importance of super, and that can be seen by what the money was spent on. So fast food and gambling are great weekend activities, but when you compare those to saving for your retirement, we know what we would pick as the priority. So, I think it’s important to understand the implications of the decision.

So, Shani, why don’t you go through the first one?

Jayamanne: Yeah. So, the first one is the magic of compounding. And this is a big one. Withdrawing funds means that you miss out on the opportunity cost of compounding over the decades, and it just dramatically alters what your retirement looks like. And we mentioned that the SMC calculates a $20,000 withdrawal will result in $93,000 less in retirement. When the average balance of retiree is $435,900 for men and $381,700 for women, this is a really big chunk. And the marginal tax rate of the median Australian salary is 30%, plus that 2% Medicare levy. This is more than double the tax within super.

Over time, the tax savings on contributions and earnings compound, meaning it is difficult to match the long-run compounding benefits of the superannuation structure. So, investing in super is very attractive. You also have a reduced buffer in retirement, so market volatility doesn’t really matter at year one or five or 20 of a 40-year holding period. So, if you deplete your super too soon or too heavily, you have less buffer to ride out investment volatility or economic downturns in later life.

LaMonica: Okay, I’ll take the next couple, Shani. So, there’s obviously a higher risk of outliving your savings and a lower quality of life. So, we all want a good quality of life in retirement, and it is hard to know what the age pension will be in 40 years for some of these younger investors who are taking money out. But what we do know is that having a lower balance will mean a higher risk of outliving your savings through sequencing and longevity risk and having to rely on welfare.

Jayamanne: And I can take the next big one, and that’s that you’ve got to pay tax. You don’t just get to pull out your funds out of super without penalty. You’ll likely have to pay tax on the withdrawal. So, depending on the condition of release and your age. And I’ve got a table in my article, which is linked, and that runs through the taxes that apply for each circumstance. But generally, you’re either paying your marginal tax rate or around 20%. So, it’s not a small penalty.

LaMonica: And I think one thing that we haven’t talked about, there is a lot of rhetoric around super right now that it isn’t safe and that the government can change it at any time. So why should anyone bother with keeping money in super? And we see this in the YouTube comments of basically every super episode that we do, the latest one being our episode on investing outside of super.

Common theme is really that the trust that people have in the super system has diminished. And people are unsure about future returns. They’re unsure about changing regulations and tax, and they’re wary about locking up their savings for decades. And it’s easy to see how people have come to this place. There’s been changes that the government have made that has changed the goalposts for super. It’s really not that hard to make the connection between recent amendments to superannuation regulation and an increased distrust in the system. So, more investors are considering investing outside of superannuation to minimize the funds going into the system. But there is a difference between not maximizing your contributions into super and then taking the funds out.

So, what do you think, Shani?

Jayamanne: Yeah, I mean, I definitely haven’t lost faith in super. And I believe it’s in the best interest of the country, as it lowers the number of Australians relying on the age pension. And it’s not in the best interest of the government to make it less attractive to invest outside of super than in. And I think that super for retirement is in the best interest of people as it offers incentives to save for retirement.

And I think the people that I have in my life that I know won’t save for retirement are those that would probably need it the most with no asset basis outside of super, who aren’t able to purchase a home. And without first four savings, they would be completely reliant on the age pension and have a much lower quality of life in retirement.

Someone in my life went from being a salaried employee to self-employed a few years ago, and they have a lot of debt, no assets, and have decided not to continue their payments into super. And they’re earning more money, but their quality of life hasn’t improved, and their financial position hasn’t improved. And I know this is an anecdotal story, but super is a great system because I don’t see it as a big brother garnishing your paycheck and locking it up. I see it as something that is taking the work out of making your life better and reducing your reliance on the welfare system. And I believe that super will remain a more attractive way to save for retirement regardless of future legislative changes. And it’s in the best interests of too many stakeholders to change the fundamental truth of the system. And the primary beneficiaries will continue to be the investors who have the most money and spend the longest time in super.

LaMonica: All right. Well, I’ve got a viewpoint here. Am I allowed to share mine?

Jayamanne: Yeah, go for it, Mark.

LaMonica: Okay. Well, we’ve talked about this in a previous episode, but I obviously come from a country that also has very generous tax rates to save for retirement. I would argue they’re potentially more generous than what we have in Australia, but taking advantage of those tax rates is completely voluntary. So, there’s no compulsory aspect to the U.S. retirement system. And that never really mattered to me. I’ve always been a saver. I started saving for retirement as soon as I started earning money. And it’s easy for me to say who cares that these people that can’t save money and don’t take advantage of these tax breaks are just making their own bed, and just because they aren’t forward thinking enough to realize it’s going to affect them later.

And it is easy to say it’s not my problem, but I don’t think that’s really the best approach for society in general. So, I think a lot of people are taking this libertarian view that it’s my money, the government shouldn’t tell me what to do with it. It’s just not how I feel. So, I actually like the compulsory aspect of super. I think sometimes it isn’t about the individual’s best interest than the collective best interest that things should be mandatory just to make sure that people do what is right.

Jayamanne: Are we in agreement, Mark?

LaMonica: We agree about a lot, Shani. We agree about the Gidley Burger.

Jayamanne: We do.

LaMonica: We agree that escargot should not be served at the Clock Hotel.

Jayamanne: Yes.

LaMonica: So yeah, I think we agree with a lot. But I think what hopefully we can keep doing, Shani, is remind people why it’s so attractive to invest in super. So largely, of course, it’s the tax concession. So, contributions to super, typically taxed at 15% up to a certain threshold. And that’s a lower tax rate than the marginal tax rate outside of super on the median salary. The earnings within superannuation are then taxed at 15%. And retirement earnings are taxed at 0%. So up to $2 million that you can put into your pension account. So, this is indexed and increases each financial year. And the risk in the future is that those concessions, of course, are lowered as we talked about. But changes may make super less attractive. But as Shani previously stated, it is hard to come up with a scenario where the government will make it less attractive to save for retirement in super than investing outside of super.

Jayamanne: And then there’s a fact that super makes for better investors. And it’s that time again to talk about the Mind the Gap study.

LaMonica: I know. We might as well just have it tattooed on our forehead now.

Jayamanne: The study looks at the difference between investor and investment returns. The latest edition of the Mind the Gap study shows that investors earn 1.2% less than their investments. And that 1.2% investor return gap is basically a result of poor investor behavior. And it’s about 15% of the investment’s return. And this study is conducted across regions. Australian investors fare better than most other regions. And this difference can be explained by the forced savings and discipline imposed by super. Forced to think long term, Aussies exhibit less of that short-term behavior that does plague most investors.

LaMonica: And I think that long-term aspect has a big impact on the way we feel about this. So younger people especially have the ability to take advantage of that time. They have decades to accumulate returns, smooth volatility and exploit the compounding. Even if non-super vehicles are in the same returns, the cumulative advantage of super’s tax structure over all those decades is hard to beat.

All right. So, we’ve reached the end of the episode. We agree on things, which is amazing. But it is worth calling out that as more Aussies lose faith in super and start making withdrawals, they’re undermining their retirement and future security. And the impact is largest for young people because they have the most to lose from compounding and tax advantages. So, it’s really hard to reconcile any non-essential spending needs against this.

Jayamanne: And I think while policy changes shifting the attractiveness of super is front of mind for many Aussies, the structural tax advantages, preservation rules and compounding benefits suggest that super will remain on balance a more attractive vehicle for retirement accumulation than ordinary saving. And this is especially true for those on higher incomes with many years ahead of them until retirement. So please be careful with your retirement savings encouraged by self-interested companies. It may seem like a ripe opportunity to use funds. Carefully consider making this choice for non-essential spending as it is your quality of life that you are handing over with extra tax to the ATO to boot.

LaMonica: All right. Thank you guys very much for listening. Please keep Priscilla in your thoughts and prayers as he tries to overcome this tummy ache, potentially from a snail. But maybe something else.

(Disclaimer: Any advice in this podcast is general advice or regulated financial advice under New Zealand law prepared by Morningstar Australasia Proprietary Limited and/or Morningstar Research Limited without reference to your financial objectives, situations or needs. You should consider the advice in light of these matters and any relevant product disclosure statement before making any decision to invest. To obtain advice for your own situation, contact a financial advisor.)

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