For what it’s worth, I’m not sold on the idea of using superannuation to help fund a house purchase. Apart from the fact that it flies in the face of the superannuation sole purpose test it could, as many commentators have pointed out, be a sure-fire way to boost home prices, therefore making it a lose/lose proposition.
Nevertheless, I do find the huffing and puffing about the scheme, by everyone from media commentators to former prime minister Paul Keating, just a bit hypocritical.
Why using super to buy property should be allowed
Trustees of self-managed super funds (SMSFs) can invest in property
Buying property with super is in fact already possible – if you have an SMSF rather than just a plain old super fund.
As an SMSF Trustee, you can’t invest funds in a property that you want to live in, but you can certainly pour the SMSF money (plus home loan borrowings) into investment property. And according to the most recent ATO statistics, SMSFs do just that, currently holding just over $24.4 billion in residential real property.
That, combined with negative gearing and a few other things that the government seems unwilling to tackle, is making it increasingly difficult for first home buyers to get a foot in the front door.
Most superannuation funds have a property investment option
You know how super funds invest in a bunch of different investment asset classes? One of those is residential property.
Even just within default MySuper products, the target asset allocation to property is currently at least $28 billion, based on current APRA statistics.
So it’s good enough for well-paid fund managers to use our retirement savings to invest in property – we’re just not allowed to do it ourselves.
Primary carers take a double blow
Most importantly, and focusing here on the impact of retirement wealth, there’s comparatively little outcry over the hit that primary carers take to their superannuation as a result of parental leave. Superannuation contributions are not part of the current government parental leave scheme, and certainly employers aren’t required to pay super guarantee contributions for someone on unpaid leave.
This means that if you take time off from work to have kids – as many women do – then your super balance when you retire will automatically be just a fraction of that of someone who worked their whole life. It isn’t just the fact that the unpaid leave means a break in super contributions – it’s the fact that those returning to the workplace often miss out on equal pay, promotions, and may have to change to part-time work for many years.
Our researchers here at CANSTAR have calculated that for someone who starts full-time work at age 23 on $55,000/year and receives a 9.5% super contribution into a fund that earns 7% net of fees, they could expect a retirement balance of around $828,000 at age 60.
If they take five years out of the workforce, between ages 30 – 35, their retirement balance could be closer to $688,000 (all other things being equal).
That’s a $140,000 hit to their super, let alone lost wages and experience.
Let’s say for arguments sake, though, that the worker didn’t take time off for kids. Instead, at age 30, they took $25,000 out of their super fund to help buy a house to live in.
Guess what? The impact on their future retirement savings would be almost identical to the worker who took five years unpaid leave to raise children. Hmmm.
So why the outrage over the decimation of retirement savings for home buyers – who after all, are buying an asset – without an equal outrage over the hit to retirement savings of primary carers? It seems a bit hypocritical to me.
Example: Using super to buy property vs taking a career break
The below assumes a worker starts full-time employment at age 23 on a salary of $55,000/year, indexed at 2.5%, and receives employer contributions of 9.5% per annum, into a super fund that earns 7% per annum net of fees and costs.
|If the worker…||Projected super balance at age 60|
|Takes no break from FT employment||$828,506|
|Takes 1 year off, at age 30||$798,611|
|Takes 3 years off, from age 30||$741,709|
|Takes 5 years off, from age 30||$688,453|
|Takes no time off, but withdraws $25,000 at age 30||$686,932|
Please note this is a calculation based on the assumptions mentioned above staying the same, and should not be relied upon as a personal projection.
If you’re comparing Superannuation funds, the comparison table below displays some of the products currently available on Canstar’s database for Australians aged 30-39 with a balance of up to $55,000, sorted by Star Rating (highest to lowest), followed by company name (alphabetical). Use Canstar’s superannuation comparison selector to view a wider range of super funds.
Fee, performance and asset allocation information shown in the table above have been determined according to the investment profile in the Canstar Superannuation Star Ratings methodology that matches the age group you selected.
For more information on this topic, read this article.