COVID issues will last a long time

COVID is causing great concern and in Canada, the government issued Canadians impacted an emergency (Canada Emergency Response Benefit CERB)payment of $2,000 a month, The government is also looking very seriously at the concept of a guaranteed annual income and a major shift in how the government deals with low income Canadians. In addition, those who had savings in their Pension Plan, could reduce the amount they had to withdraw from the plan. In Canada, the government imposes a minimum withdrawal rate so that any money in your private pension plan is gone by the time you reach 92.

In Australia, where my daughter lives as many as four in 10 Australians withdrew from their superannuation under the Federal Governments early super access scheme. My daughter and her mate were part of this group. The withdrawal was to help sustain their income, however 40% saw no drop in their income during COVID-19.

Over a quarter (21%) who accessed their super early experienced a pay rise of more than 10% but although my daughter saw a raise, it was not as high as 10%. The scheme, introduced in March, has allowed people experiencing financial hardship because of COVID-19 to withdraw a total of $20,000 tax-free from superannuation ($10,000 in two separate stages).The Australian Taxation Office (ATO) has warned that those misusing the scheme could face fines of up to $12,000 and pay tax on the amount withdrawn.

The analysis of the spending was done by the analytics firm AlphaBeta, part of Accenture, and credit bureau illion and they analysed depersonalised banking data from more than 10,000 Australians who withdrew superannuation during round two of the scheme.

Recipients spent an extra $3,618 in the first fortnight after receiving the lump sum, compared with what their average spending was in a normal fortnight before the early super withdrawal scheme.

On average, Australians withdrew around $7,495 of the $10,000 limit. The analysis found that as with the first round of the early super withdrawal, Australians have used this money to increase their spending rather than maintain it. Almost two-thirds (64%) of this additional spending was on discretionary items such as clothing, furniture, restaurants, and alcohol.

Meanwhile, spending on debt repayments has dropped slightly since the first round of early super withdrawal, from 14% to 12%. More than half the people that withdrew the second amount had no change in income. In fact, almost a quarter had increased their income and continued to withdraw from their retirement savings.

This type of short-term decisions will have a major impact on the retirement incomes of those who withdrew their super over time.

By gender, the average super withdrawal in the second round was $7,240 for women and $7,750 for men. The analysis also found that men and women spent their lump sum in different ways. Women said they spent almost 30% on essential goods and services, while men spent 22% on essentials. Women spent 15% of their super money on debt repayments (this includes buy now pay later debts), while men spent 12%.  To be eligible for early release of super, you must be unemployed, have been made redundant, or had your working hours reduced by at least 20% since January 1.

But the study found that many people who accessed the scheme saw no drop in their income while others even had a pay rise, raising questions about whether those accessing the money really needed it.  This means that people did not see the long-term consequences of their decisions and this may cause issues in a few years when they start to retire and don’t have the income they thought they would.