The economic impact of the COVID-19 health crisis has been felt across the entire country. Almost every industry sector has been affected and we know that there are many people concerned about their financial security.
The Federal Government announced a broad range of stimulus benefits that are designed to support millions of Australians during this time… but there is one specific measure that should be considered carefully before being utilised. We believe early access to superannuation could have significant long-term consequences that outweigh the relief it provides today.
We spoke to Ben Rossi, Managing Director and Principal, about whether utilising the government’s early access to superannuation allowance is the right decision.
“We know this is a very difficult time and that accessing super might seem like an easy way to reduce some financial stress… but we want to make sure that people are aware of how their decision to withdraw funds today will affect their superannuation balance at retirement.”
Details of the measure and eligibility
For individuals affected by COVID-19, the government has stated that $10,000 can be withdrawn from their superannuation before 1 July 2020 and an additional $10,000 from 1 July 2020 until 24 September 2020.
If eligible, you can access a total of $20,000. You can apply via myGov and will not be required to pay tax on the funds released. Any amount withdrawn under this measure will not be considered in income or means tests for other Centrelink support payments.
You are only eligible for early access if you meet one of these criteria:
- you are unemployed
- you are eligible to receive a JobSeeker Payment, Youth Allowance for jobseekers,
- Parenting Payment, Farm Household Allowance or Special Benefit
- on or after 1 January 2020 –
- you were made redundant
- your working hours were reduced by 20% or more
- if you are a sole trader, your business was suspended, or there was a reduction in your turnover of 20% or more.
The ATO has stated that “you will not be required to attach evidence to support your application; however, you should retain all records and documents to confirm your eligibility.”
Other opportunities for financial relief
Ben says, “Of course we understand that if you have no other choice, then you have to utilise this measure, but there are some other options available. Our concern is that people will jump to withdrawing from super before they have exhausted other opportunities.”
Before you consider accessing your superannuation, there could be other support measures available to you. We have outlined the full range of government stimulus benefits in a previous article. This covers Centrelink payments such as Economic Support Payment, JobSeeker and the Coronavirus Supplement, but in addition to these, there are also other actions you could take.
Reviewing your regular financial commitments and discussing your financial position with your bank and other service providers could offer some relief during this crisis. Ben says,
“Right now, we know that some banks are willing to come to an agreement on deferring loan repayments for the next six months. This could help alleviate the pressure of mortgage commitments on a household.
There is also an indication that utility service providers are looking at how they can support customers through this time, so it is worth discussing your situation with your provider.
Plus, we know that landlords are starting to help tenants who have lost their jobs or had their income significantly reduced. You could consider requesting a temporary reduction in rent to see you through the next few months. While it is definitely a stressful time, there are options available that could help relieve some of the financial strain.”
The impacts of withdrawing your super
There are significant repercussions to withdrawing up to $20,000 from your superannuation account. Some can have an immediate impact and others are more long term.
An immediate consequence to consider is the impact on any insurance held within your super… for example, Income Protection insurance and Life or Total Permanent Disability insurance. The balance of your account might limit or change the cover you receive, so it is important to review all the fine details before you make a decision on withdrawing funds.
Another consideration is the impact of the recent contraction of the share market. To access cash out of your super, it will require a sell-down of some of your investments.
If you are invested in growth assets, their value could be diminished significantly, so selling them now will lock in a permanent loss and means you will miss out when markets eventually recover.
The long-term implications of withdrawing your super might not be easily identified today, but when you calculate the difference at retirement age, the numbers are salient. Ben explains,
“How much difference it makes to your retirement savings depends on how long you keep it invested and how much your investment earns… but the numbers are very interesting.
If you earned 7.5% per annum on the $20,000… the amount you would have foregone after 10 years is around $41,000… about double the withdrawn amount. Initially, that doesn’t sound so bad.
After 20 years, however, it’s just over $85,000… or around 4 times what you took out. That is where it starts to sound significant. If you left the $20,000 in your super for 35 years, it’s over $250,000!
Hard to believe that accessing $20,000 today, could equate to over a quarter of a million dollars after 35 years. And that’s the case if you earned 7.5% pa.
What if you invested for higher growth and, in the long term, earned 9% pa?
After 20 years, it would be $112,000… over 5½ times what you withdrew. And after 35 years, it equates to $408,000. That amount could be life changing.
But not everyone earns 9% pa. What if you invested very conservatively and earned around 3% pa? After 10 years, you would have foregone about $27,000. And after 35 years, it would have been $56,000… so, in this scenario, the impact to your retirement savings wouldn’t be as dramatic.
If you do access your super, we encourage you to treat it as a loan from your future self. Paying the loan back into your super via additional contributions as quickly as possible when everything returns to normal can mitigate some of the compounding interest loss you would otherwise incur.”
There are two unique takeaways from these calculations, both of which First Financial recommend you consider before you make your decision.
Compounding earnings can have a measurable effect on your money, so think carefully and exhaust all other options before you take money out of super today.
If you have time on your side, investing for growth can make a massive difference to your financial position and lifestyle in retirement.