Almost one million Australians have taken the opportunity to withdraw money from their super so far – but far from splurging, they are taking a surprisingly strategic approach.
The average withdrawal from the Commonwealth Bank was $8,320, indicating people are using the money for specific debts while trying to preserve their nest egg.
Craig Day, Colonial First State’s technical super expert said the figure suggests that Australians are being extremely cautious.
“Rather than taking out the full $10,000, which the industry thought would be the case, it turns out Australians are being very careful.”
The early access to super allows Australians, New Zealanders, permanent residents and temporary workers who have lost their jobs, are ill, been stood down or are in financial hardship, to withdraw $10,000 of their super until 30 June 2020, and a further $10,000 from 1 July to 24 September 2020.
It has been controversial as industry super funds have been keen to dissuade members from withdrawing funds because they earn fees from money under management.
But the biggest controversy has surrounded exactly what it means to super balances and retirement.
One super industry body says a 30-year-old who takes out the $20,000 available to them now, could stand to lose as much as $97,214, and with compound interest, it could be as high as $120,000 if they retire at 67.
The Australian Securities and Investment Commission says that’s wrong – it would actually be $43,200.
“The most prudent way is to apply the ASIC numbers on your super fund. The best of the way to look at this is the independent umpire. For someone about 25, they are showing in today’s dollars, you would be losing around $43,000. But the other thing to note is that what does it mean to an income stream in the future,” said Mr Day.
“It is important to understand, the younger you are, the more time you have to repair your superfund. Younger people, when they can, will have to start recontributing by salary sacrificing, for example. For a lot of people, withdrawing their super is not an academic exercise. People need the money.”
But it’s not just the young that also have to be wary of their money. Mr Day said that if you are edging closer to retirement age, you will also have to look at a number of things like – the age in which you retire and retirement income.
“The closer you are to retirement is when you will see a smaller impact in terms of future lost investment earnings. But, bear in mind, you need to examine your financial strategy,” he said.
“If you get good returns early into retirement then generally, it will provide a good level of income throughout retirement. But if you hit negative returns early in retirement, that can have quite a significant impact in terms of long-time of your retirement income revenue stream. For example, if you are someone that is closing in on retirement and is now needing that $20,000. If that is the case, then you will need to review the age in which you retire, as well as your income during retirement.”
Important Superannuation Withdrawal Tips and Reminders
Withdrawing money from your super has its risks. Remember, super is intended to support you when you stop working, so an early release could affect your nest egg.
Here are important things to consider to help you make an informed decision.
Alternative Assistance from the Government
As of press time, most of the major cities in Australia are still on lockdown. The ongoing crisis could result in challenges in paying bills, debt repayments and even paying for basic necessities such as food and rent.
Taking out some money from your super can help you with the financial burden, but there are other options available.
For instance, you might be eligible for other programs administered by the government such as the Coronavirus Supplement or the JobKeeper Payment.
Many Australian banks are also offering credit card or mortgage repayment freezes, but you must call your bank and ask if the freeze is also applicable to the interest rate or if you will still incur interest during the program duration.
Some utility companies and even your landlord may offer you flexible terms when it comes to settling your bills and rent.
Also check if your personal loan or home loan offers a redraw facility that you can take advantage of. You might also have assets that you can sell to increase your available cash.
Depending on your balance in your fund and how close you are to transition to retirement, accessing your super early can have a significant effect on the quality of your life during retirement.
Based on a report from the Association of Superannuation Funds of Australia (ASFA), a single person in Australia needs at least $545,000 while a couple requires $640,000 to retire comfortably.
If you are still young, it can be hard to determine how your super can help you during retirement. There are online super calculators that you can use, but you may need a professional to provide you important financial advice.
Also you need to consider that while the short-term effect of taking out your money will reduce your balance by the amount you withdraw, there could be a much bigger effect on your nest egg over the long run.
Take note that you are more likely to miss added returns that you could have earned from your investments of that money by your fund or compounding.
Compound interest can help in growing your super fund, but it also has the power to exponentially increase the impact an early withdrawal now could have on your fund after several years.
To calculate the possible effect on your super, you may visit this online guide from Money Smart.
Possible Loss of Insurance
Another potential impact of superannuation withdrawal is losing insurance coverage.
If you take out a lump sum from your fund and your balance reaches zero, then the account could be automatically closed. So, the insurance will also be cancelled, and you might be left out in the cold if you suddenly need money for emergencies such as an important medical treatment.
In 2019, super laws were established to safeguard super balances from being accidentally reduced by insurance premiums.
For example, the Protecting Your Super legislation now requires super funds to stop any insurance bundled in super accounts that are no longer receiving contributions for 16 months.
So if you are not able to make any contributions into your account for a certain period, your insurance coverage will stop unless you inform your super fund that you are interested to continue.
If your insurance stopped because of the 16-months rule but your balance is still under $6,000, your fund can be transferred to the Australian Taxation Office ATO who will try to link your super fund with your active super.
Think Twice Before You Withdraw Your Super
Before you apply for early access, you should first determine how much you need and only withdraw that amount, instead of the maximum $10,000 withdrawal.
Remember, the more money left in your account, the more money you can grow and use during retirement.