The long-term danger of one-off superannuation withdrawals
Financial advisers have been warned against advising clients to withdraw superannuation for medical or dental treatments.
In a note to financial institutions and their advisers, Tim Toohey, head of macro and strategy at Yarra Capital Management, said super withdrawals for medical reasons have risen 88 per cent since 2019.
There are legal compassionate grounds for super withdrawals for:
• Medical treatment and transport.
• Preventing foreclosure or forced sale of a home.
• Modifying home or vehicle for severe disability.
• Palliative care.
• Funeral expenses.
These options existed before the early withdrawal measures of COVID-19, but Toohey is concerned funds are being used for purposes other than these reasons.
This is especially the case for medical treatments, particularly dental ones where withdrawals for dental purposes have risen from $66 million in 2019 to $313 million in 2023. Medical treatment equated to 96 per cent of all claims granted under the early release scheme in 2022–23, Toohey said.
Currently, the medical suboptions only cover dental, IVF, weight loss and “other”, and applicants must provide two medical reports that state the treatment is necessary for life-threatening reasons to alleviate acute or chronic pain, or mental illness.
At the current rate of growth, super withdrawals under the dental category would exceed $1.2 billion by 2027, he estimated.
“Are braces and hair transplants really life-threatening and chronic conditions?,” he said.
“This is clearly not the intent of the existing legislation, but a lack of enforcement on what constitutes a chronic medical condition and divergent incentives between medical practitioners and superannuation members are helping facilitate rapid growth in the withdrawal of superannuation for medical procedures.”
Compounding this is the raft of third-party intermediaries at medical or dental firms that offer to handle the withdrawals and assist applicants with the necessary forms, for a fee, and that may encourage withdrawals for cosmetic purposes. He also flagged individuals may not understand how many dentists are paid on a commission or a tiered basis, dependent on their average billing rate.
“This has all the hallmarks of a classic principal-agent problem. In this case, the agent is the clinic or a third-party intermediary and the principal is the individual superannuation member.
“The principal-agent problem typically arises when the principal cannot directly ensure that the agent is always acting in the principal’s best interest. This is particularly the case when activities that are desired by the principal are costly and where elements of what the agent does are difficult for the principal to observe.”
Looking further down the track, however, these one-off withdrawals can have a long-term effect on an individual’s super balance at retirement.
It estimated that a 30-year-old who withdrew $20,000 for a cosmetic procedure will forego $151,200 in superannuation savings by retirement, assuming a 7 per cent return and a tax rate of 15 per cent. If they will take a second withdrawal at the age of 35, then this number can rise to $265,000 by retirement.
“Left unchecked and without addressing the clear moral hazard embedded in the current system, it is reasonable to conclude that Australia’s superannuation system will increasingly be used to fund discretionary wants over chronic needs,” Toohey concluded.
AUTHOR
Laura Dew
Recommended for you
Following an extraordinary general meeting today, Dixon Advisory parent company E&P Financial Group’s shareholders have voted on its proposed delisting from the ASX.
While overall financial adviser numbers have dipped below 15,500 this week, Rhombus Advisory is experiencing growth and approaching 500 advisers in its ranks.
Iress’ Xplan continues to dominate the financial planning software market with a multitude of uses, according to Netwealth research, despite newer players battling for a piece of the pie.
ASIC has shared the percentage of breach reports related to financial advice in FY24, noting increased reporting by smaller AFSLs.
I think Mr. Toohey's conclusions and extrapolations are "currently" merging on the typical SMSF issue of "....prone to exaggeration".
The "sub-options"as described in the Article are: ".......
“..........other”, and applicants must provide two medical reports that state the treatment is necessary for life-threatening reasons to alleviate acute or chronic pain, or mental illness. "
The Definition of "Mental Illness" again appears to rear its ugly 'deceptive' head as it does continiouly and constantly in the Income Protection Insurance market. Someones "mental illiness" , it could be argued is paramount to their feeling of life itself; e.g. "I can't go out in public or work because I am so ashamed of my "teeth".It is totally effecting my entire life because it causes me so much anguish and stress, so I drink and take drugs". Exaggeration, you say? Not so ! Read below.
Arguments of this nature and many like it are used, and indeed abused, by claims in Workers Compensation, Income Protection, etc. It must be remembered that few,if any doctor, is going to tell a patient that this argument is fallacious and the patient needs to grow up. They could be sued if anything untoward insues. Doctors have a tendency to believe their patients and that is understandible.
To worsen the situation people in their 20s,30s,40s etc see super as very far off !
The lesson here is simple ! When you break "THE RULE" being "Super is for the provision of income during retirement... and other events under Section 62 , the flood gates open. The exceptions will continue to grow and with the "mental illness" issue ,this is absolutely gauranteed and inevitable.
Apply the Law. Restrict legislative exceptions of judicial opinions as much as possible.