Australians are increasingly dipping into their superannuation early to cover medical expenses.

But it is coming at a large cost.

The number of Australians turning to their retirement savings to cover emergency medical costs increased almost 37 per cent in the 2017-18 financial year according to The Australian, with more than 26,000 early-access applications approved on medical grounds.

That increase is in line with a trend that has seen the amount of super released early on compassionate grounds grow from $42 million in 2000-01 to $290 million in 2016-17.

The size of these withdrawals is large too, with a review of approvals conducted by SuperGuide showing members were withdrawing an average of $14,000 from their super in the 2017-18 year.

However, the cost of taking that money out of superannuation before retirement is greater than the sum of money initially removed, due to the effects of compounding interest.

Modelling conducted by Rice Warner senior consultant Nathan Bonarius found that removing $14,000 from superannuation at age 30 would mean retiring with $27,300 less in today’s dollars.

For someone on the median income, that would mean retiring with 7.4 per cent less in savings.

Retirement income would also fall, albeit by a smaller 2 per cent ($800) per year as the lower retirement balance would be partially offset by a larger age pension payment, however this would come at a cost to government.

Early access part of system design

ASIC MoneySmart senior executive Laura Higgins told The New Daily it was important that people in need could draw on their super when it’s appropriate to do so.

“As part of [ASIC’s] mandate, we want Australians to be in charge of their financial lives, and certainly as part of that, we wouldn’t want people drawing on super to meet everyday expenses,” she said.

“We would like to see these products used the way they were designed to be used, and we want the design to meet consumers’ needs, so the idea of being able to access super before preservation age for quite serious reasons, like managing a terminal illness or on compassionate grounds, has to meet people’s needs too.”

Before attempting to draw on super though, Ms Higgins said super members should check their eligibility for early access on the Department of Human Services website.

Members should also reach out to their fund – and potentially even seek independent advice – to assess whether early access is appropriate for their circumstances before taking action.

Review a ‘balancing act’

Treasury is reviewing the benefits of early access to superannuation; a task that Mercer senior partner David Knox said will present a challenge for government.

Speaking to The New Daily, Mr Knox said there’s a need for early access to be available for the minority of people who genuinely need it, but it’s important those early access rules don’t undermine superannuation’s intended purpose.

Ultimately, Treasury’s review will need to be a “balancing act”, he said.

“One needs to consider the purpose of super and not get distracted by saying ‘We can use super to pay for x or y’ – there’s always a good use for money, but the primary purpose of super is to give Australians a dignified retirement,” Mr Knox said.

“My concern is that if we’re not careful, the tail ends up wagging the dog.”

Mr Knox acknowledged there are numerous instances where accessing superannuation early makes sense, such as for women trying to leave abusive domestic situations, but presently there’s a “significant grey area” shrouding early access rules.

The New Daily is owned by Industry Super Holdings