This week, we get super political, we’re talking about taking money out from your superannuation (super). This topic stems from how a lot of Australians are struggling to save for a house deposit, which is where super comes in.
House prices are high and people having trouble saving a house deposit, therefore with money sitting in super there is a desire to access this. So we’re going to delve into whether it’s a good idea or bad idea to access super to pay for your deposit. The Australian Government are speaking about allowing people to access this money to fund their home deposit too.
What is super?
Superannuation money goes towards your retirement savings account – basically, your employer pays 9.5% of your income into your nominated super fund. It’s just an environment for funds, it’s not a special account or anything. It does get a bad rap though.
To explain super, Louis uses a car analogy. All super is, is an environment getting you from point A to point B, there are different platforms and more expensive ones, however, what’s important is the driver inside not the brand. Super has a bad rap because people invest in rubbish. So with a car, if you’ve got someone who’s a bad driver, they will crash. It’s not so much the account you have but it’s the investments that you’re in.
Inside your super environment, there’s a tax cap of 15%, when you’re in the first phase which is the accumulation phase, then when you go into pension phase and have ceased working that tax rank is 0%.
We have the third best system in the world (behind Denmark and Netherlands).
- Good: Tax effective environment. Forced savings for retirement.
- Bad: Can’t access, some accounts not transparent/flexible on investments.
Why it may be bad take your super account:
You may be robbing yourself of future wealth/retirement as you’ll miss out on the compounding interest: $30,000 today is $443,000 in 35 years (8% after tax and costs). If you take this amount out to buy a house, you won’t get this compounding interest. A home isn’t an investment. It will go up in value, but you can’t fund retirement off this.
You lack diversification. Typically, you’re diversified. So you might have $40k across different assets, but if you take it out and put it into one property you’re living in, you’re not diversified.
ASFA found that in 2015 Australian aged 20-24 super fund is sitting around $5,118. For a 25-to-29-year-olds it’s $16,441, and for someone aged 30-34 it’s $30,937.
If the average home deposit required is between $50k to $80, then this money isn’t close to what’s needed to cover it anyway
Most young people don’t have much in super due to:
- Not working long enough for it to compound
- Aren’t on high incomes yet
- Have multiple accounts, each with fees and insurance premiums
So with these figures, most people wouldn’t even have a deposit if they took the money out of their super. If you throw it into a property, you’ll take on more debt anyway, so is it the best option?
If you haven’t check out your super funds, fix it up.
Taking money out won’t help its affordability, which is the underlying issue.
Through this scheme, it would mean that more people are able to afford housing, therefore there will be more demand which will increase the price even more. This is similar to how the price of property goes up with the first home buyers grant, distorting the market. So this being a short-term incentive won’t help.
So this being a short-term incentive won’t help.
Buying property isn’t that cheap.
People forget that yes, comparing owning and rental payments per week may be the same, but at the moment we’re in historically low-interest rate environment. So if the repayments change with interest rates, this will affect repayments greatly.
There are a whole lot of extra expenses, rates, insurance, maintenance, that add extra costs.
You’ll get money out, so you can withdraw your super! Using super money seems like such a long way away, so this option means that you can use it earlier.
The bad side of good side:
If you do take money out of your super, there’s a high chance it will get taxed, currently, if you take money out for a severe financial hardship, you’re going to pay 20% tax on that. In general the government won’t let you take money out as early release funds without this tax.
Marginal Tax Rate (MTR)
Marginal tax rate, they’ll assess you on your marginal tax rate or 22%, whichever is lower. As an idea, if you’re earning above $37,000 you’ll be paying 22%.
To fix it: start saving
Super boring, but the most effective way of doing it. Set a target of how much you need and work out how much to save to get there. Save an extra $880/per month and that’s equivalent to how much extra money you need when you own a property.
An alternative option to this is a family guarantor loan, using your parents or relatives property where you borrow against that in your name. You do need to have a high income, so that you can pay back that initial money quickly.
Summary of withdrawing your super:
- Taking money out of your super could be robbing your future wealth or retirement savings
- Make sure you don’t have three or four different super accounts because you’re getting charged for them all
- Property isn’t cheap to own and run, it’ll only get more expensive as rates go up
- You’ll have to pay tax on that money
- How to get a deposit: save or get a guarantor loan.
The Rentvesting Podcast, available on iTunes, was created by Red & Co’s Jayden Vecchio and expert financial planner Louis Strange. Together, Jayden and Louis unpack the facts behind the property market, explain what’s really going on & where the market is heading. They believe in challenging the status quo and want to get out there to educate absolutely anyone looking to enter the property market.