The $20,000 COVID-19 question – Should I access my super early?

1 May 2020

In recent weeks, we have seen the government take several measures to help those who are experiencing financial hardship due to the impact of the COVID-19 pandemic. One of those measures is eligible individuals can draw up to $20,000 from their superannuation over the next two financial years.

Who is eligible?

  • The unemployed.
  • Those eligible to receive a Jobseeker payment, Youth Allowance for Jobseekers, Parenting Payment, Special Benefit or Farm Household Allowance.
  • If on or after 1 January 2020:

- A person’s role was made redundant.

- A person’s working hours reduced by 20% or more.

- A sole trader’s business has been suspended or has suffered a reduction in turnover of 20% or more.

What is the process?

  • If you are eligible, you can apply online through myGov for early access to your super from 20 April when the ATO deploys the application form.

But just because you can access your super early doesn’t necessarily mean you should.

Recently while visiting a friend, I was offered his wife’s famous home-made cookies. She knows I have a weakness for her cookies, and how could I resist? But just because I can eat another cookie doesn’t necessarily mean I should. With my football season recommencing soon, I’ve decided to maintain my health and fitness and in turn ask myself: Is this second cookie a need or a want? Have I considered the consequences of this action?

For those experiencing severe financial hardship due to loss of earnings and employment, accessing your superannuation early may be the only viable option to help with immediate expenses and obligations. But for others, who may meet the criteria but are not in severe financial hardship, ask yourself - is this is a need or a want and have you considered all other options on the table?

Let’s have a look at some of the potential benefits and drawbacks of accessing super benefits early:

Benefits of accessing your superannuation early

  • $20,000 can be withdrawn over the next two financial years to help meet immediate expenditure requirements – for families, this may be up to $40,000.
  • Funds accessed are tax-free.
  • Relief of personal, family and financial stress.
  • Avoids individuals having to sell personal property, investments or personal goods and the self-employed from selling any business equipment at reduced prices.
  • Allows an individual to plan for future hardship if prolonged unemployment occurs by accessing funds from super and placing these in the bank.

Drawbacks to accessing your superannuation early

  • Accessing super includes selling units at a low unit price.
  • Loss of future compound interest on year-on-year returns.
  • Potential loss of insurances for small account balances (under $6,000) from April 1, 2020.
  • The long-term implications on retirement, as super is generally an individual’s main retirement funding vehicle besides the Age Pension.
  • Accessing super early goes against the reason for its existence – to fund a person’s retirement.
  • Seeing this as an opportunity to withdraw from super for other purposes such as a house deposit, new car, etc.

The Compound Interest factor

We often hear the terms “buy low” and “sell high” mentioned. Domestic and global markets have recently experienced some of the highest levels of investment market volatility on record, which has led to the All Ordinaries and the Dow Jones Index shedding upwards of 20% since mid-February. This means if you access your super now, you will be dipping into your super savings at a discounted value.

While timing the market is hard to do, one thing you can control is your time in the market. Given the current discounts on the values of stocks and other asset classes, remaining invested should not crystallise in any loss. While your super fund balance may have reduced, the units held within the fund have remained the same. If you make a withdrawal from your super now, when markets begin to recover, you will lose the benefits of compounding interest on a greater number of units.

Let’s have a look at the following scenario where we assess the actual cost of a super withdrawal of $20,000 based on the following parameters:

Source: https://moneysmart.gov.au/covid-19/accessing-your-super

  • Retirement age – Age 67
  • Salary - $50,000pa
  • Super Balance - $80,000
  • Employer Contributions – 9.50%
  • No other super contributions made
  • Super Admin Fees - $74 pa
  • Investment returns – 7.50% pa
  • Tax on earnings – 7.00%
  • Investment Fees – 0.85% pa
  • Inflation Rate – 4.00% (2.50% pa due to the rising cost of living (CPI) and a further 1.50% pa for the cost of rising community living standards)
  • Insurance Premiums - $300 pa

Super Balance at retirement if no super withdrawal made:

Super Balance at retirement where a $20,000 super withdrawal is made:

Impact/Difference

Age 25

$504,106

$456,440

$47,666

Age 30

$432,088

$389,085

$43,003

Age 35

$367,115

$328,319

$38,796

Age 40

$308,499

$273,499

$35,000

Age 45

$263,262

$236,174

$27,088

From the table above, you can see the impact accessing super benefits early can have on the long-term balance of your super fund. This impact is heightened where funds are drawn at a younger age.

The impact on insurance

Another factor worth considering for those with relatively low super balances is the impact accessing super benefits early can have on the insurances held within the fund.

The Australian government recently passed the Putting Members' Interest First (PMIF) legislation, which took effect on 1 April 2020. The PMIF package introduced a number of changes, including cancellation of insurances for members with low balances if they didn’t opt in to retain their cover or increase their account balance to $6,000. This can potentially lead to an individual being under-insured should an unforeseen circumstance occur.

Despite the recent legislative changes and relaxation around accessing super benefits, the sole purpose of superannuation has not changed, which is to help everyday Australians fund their retirement. So before accessing your superannuation benefits early, it is worth exploring all other viable options available such as your eligibility for government payments such as JobSeeker or JobKeeper, or contacting your bank, lender and/or landlord so you can avoid the long-term consequences outlined above.

For further information or advice on your superannuation, consult your Financial Adviser who will be able to advise what options are available and provide solutions tailored to your individual needs and circumstances.

Important Information

The information contained is of a general nature only and does not take into account your objectives, financial situation or needs. You should consider whether the information is suitable for you and your personal circumstances. Before you make any decisions in relation to a financial product, you should obtain and read the relevant Product Disclosure Statement or information statement. You should seek personal financial advice before acting on any material.

This content is also not intended to constitute legal or taxation advice as it is of a general nature only. If you require financial, legal or taxation advice, we recommend you speak to a qualified adviser.

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