Withdrawing your super early

May 20, 2020 | COVID-19, Superannuation

As the COVID-19 virus took a sledgehammer to the economy, the federal government rapidly introduced a range of initiatives to help individuals who lost income as a result of the measures taken to control the virus.

One of those initiatives was to allow qualifying individuals access to a portion of their superannuation to help them meet their living costs. Withdrawals are tax free and don’t need to be included in tax returns. Most people can withdraw up to $10,000 in the 2019/2020 financial year and up to a further $10,000 in the 2020/2021 financial year.

For many people this early access to super will prove to be a financial lifesaver, but for others the short-term gain may lead to a significant dip in wealth at retirement. And the younger you are, the greater that impact on retirement is likely to be. 

Alexander provides an example that many people will be able to relate to. He’s a 30-year-old hospitality worker, and due to the casual nature of his recent employment he is not eligible for the JobKeeper allowance. He is eligible to apply for early release of his super under the COVID-19 provisions, however before going down this route he wants an idea of what the withdrawal will mean to his long term situation.

Taking the max

Much depends, of course, on the future performance of his superannuation fund. However, if Alexander withdraws $20,000 over the two financial years, and if his super fund delivers a modest 3% per annum net return (after fees, tax and inflation), then by age pension age (currently 67), Alexander will have $39,700 less in retirement savings than if he doesn’t make the withdrawal.

At a 4% net return, he will be $65,360 worse off if he makes the super withdrawal.

But that’s not the only disadvantage for Alexander. A smaller lump sum at retirement means a lower annual income. If Alexander draws down his super over a 20 year period, at a 3% net return, he will be around $2,670 worse off each year as a result of making the withdrawal. Over 20 years that adds up to a total loss of $53,375. At a 4% return, his youthful withdrawal will cost him over $96,000 by the time he reaches 87.

Reducing the risk

On the plus side, if Alexander is eligible for a part age pension when he retires, his smaller superannuation balance may see him receive a bigger age pension.

There are other things Alexander can do to reduce the financial consequences of accessing his super early. One is to only make the withdrawal if he absolutely has to. Or if he does make the withdrawal, to use the bare minimum and, when his employment situation improves, to contribute the remaining amount back to his super fund as a non-concessional contribution.

 

COVID-19 is adding further complexity to our financial lives, so before you make any big changes to your financial situation, speak to one of our financial advisers and accountants to get personalised advice for your unique situation. 

 

Book Your Financial
Health Check

Receive customised recommendations to improve both your personal and business related financial health.

Related Blog Articles

How interest rate changes affect your mortgage

This article discusses the importance of understanding your home loan interest rates and how interest rate changes affect your mortgage. It includes a formula to calculate your home loan repayments and concludes with a recommendation to seek the assistance of a mortgage broker. – How interest rate changes affect your mortgage.

read more

The three stages of retirement planning

This article explains the three stages to retirement, outlining the most important considerations when planning for these years and cover Government assistance, through to strategies for retirement planning. – The three stages of retirement planning.

read more

Offset account vs redraw facility

This article explains what the difference is between offset accounts and redraw facilities, concluding the use of offset accounts to be the better of the two. – Offset account vs redraw facility.

read more

Financial planning: The secret to ‘living the dream’

This article refers to the results of the Financial Planning Association’s “Living the Dream” report to explain what it takes to achieve this lifestyle and why seeking financial advice is a good start. – Financial planning: The secret to ‘living the dream’.

read more

Managing the transition of your interest-only loan

This article addresses potential financial stress caused by the expiry of the interest-only period of IO loans. It uses a case study to explain how these loans work when managed well and then provides some options for borrowers who might not be able to meet increased repayments when the IO period ends. – Managing the transition of your interest-only loan.

read more

Financial Advice services are provided by Insight Financial Partners Pty Ltd T/A Insight Wealth Perth as a Corporate Authorised Representative of
Australian Unity Personal Financial Services Limited (ABN 26 098 725 145), AFS Licence no. 234459.

PRIVACY POLICY       FINANCIAL SERVICES GUIDE