Super not for pre-retirement spending

Robin Bowerman, Head of Retail at Vanguard Investments Australia.
Robin Bowerman, Head of Retail at Vanguard Investments Australia.

AS every super fund member should know, the sole-purpose test in superannuation law provides that a superannuation fund must be maintained to provide for the members’ retirement – or for their superannuation death benefits.

In other words, super savings are not intended for pre-retirement spending.

But as ABS figures show, a large proportion of superannuation lump sums are spent by retirees to pay off mortgages and other debts. 

Consultant economist and household saving expert Dr Vince FitzGerald has long been troubled by the practice of using super lump sums upon retirement to clear debts which were run-up before retirement.

FitzGerald is quoted in the March issue of Superfunds magazine as saying that the building-up of debt before retirement with the expectation of repayment from super lump sums amounts to a backdoor way around the sole-purpose test. Superfunds magazine is published by the Association of Superannuation Funds of Australia (ASFA).

In the article headed Age of Vulnerability, FitzGerald likens the use of super for the repayment of pre-retirement debt to “a pipe stuck into the tank” to siphon away retirement savings.

As author of the much-remembered National Savings: A Report to the Treasurer, published in 1993, many people listen to what FitzGerald has to say about the state of our savings.

Later in the Superfunds article, superannuation partner for law firm Freehills Michael Vrisakis gives his view that the spending of super lump sums to repay pre-retirement debt is not a breach of the sole-purpose test. Once members have met the terms of their release for their super “they can do whatever they like” with the money, Vrisakis says.

But Vrisakis then adds that the spending of super to repay outstanding debts does raise the issue of super lump sums versus super pensions.

The points being made by FitzGerald are, of course, fascinating and should hopefully trigger more debate.

In essence, this goes back to a fundamental question: What is the real purpose of super?


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Robin Bowerman, Vanguard Investments Australia's Head of Retail, has more than two decades of experience in the finance industry as a writer, commentator and editor.

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