Nearly half a million Australians have applied to access their superannuation early, taking out nearly $4bn, as a result of the coronavirus pandemic.
Those considering doing the same may be wondering: how does it work and what impact will it have on my money?
A survey commissioned by Industry Super Australia has found that people under 40 are twice as likely to try and tap into their super early. But younger workers may not realise that taking out a little bit now could result in thousands of dollars less in their future retirement fund.
The corporate watchdog Asic has warned property owners that telling tenants to access their super to pay rent could land them five years in jail, because it can constitute unqualified financial advice.
What is super and why am I accessing it ‘early’?
Superannuation is a compulsory payment your employer makes (on top of your wages) to your retirement fund.
The money goes directly into a super fund and your fund invests it for you – some in the stock market, some in savings accounts and a variety of other investments. With compound interest and good investments, it is supposed to grow over time to much more than your weekly contributions.
You are not allowed to access your super until you turn 60.
What can I use early access for?
The new scheme is to help you cope with the financial impacts of the coronavirus. You’re eligible to take out up to $20,000 if you have lost 20% of your hours or business, if you are unemployed, or if you are on another Centrelink payment like jobseeker and others. But you can’t access it all at once. You are entitled to access $10,000 this financial year (before 30 June) and another $10,000 between July and September 2020.
Usually, at retirement, you get taxed on your super when you take it out but the early access will be tax free.
Once you take it out, that money is yours to use for anything. It doesn’t have to be used for your rent – regardless of what people tell you – or for necessities, or for debts.
How much could I lose?
The problem with taking out your super is that you lose out on the potential interest and investment gains in the long term.
So if you need the money now, Laura Higgins, the leader of Asic’s Moneysmart team, says you should look at other options first before raiding your super.
Bernie Dean, the CEO of Industry Super Australia, says the impact of taking out $10,000 to $20,000 now “could be as much as six figures”, if you’re near the start of your working life.
“It could be ranging to $60,000 to $80,000, up to $100,000 you would have less in your nest egg,” he says.
Higgins says: “If they are 25 years old now, they plan to retire at 67, they want to take out $10,000 early – that could be a $24,000 reduction to their super balance at retirement.”
Less money at retirement age also means you might have to work for longer.
Dean adds that keeping your money in your super is more important the younger you are.
“Those early contributions when people start work are like yeast. If you take the yeast out at an early stage, you end up with a flatter result.
“When people access their nest egg at the end of their working career, 80% of it is made up of the interest earned and the product of investments. Only 20% of the nest egg is actually what you put in … If you take those early contributions away, you are sacrificing all the benefits from having them sit there and compound over time.”
However, Higgins warns that super predictions vary wildly, and you should be careful of inflated future predictions. Some calculators give your final balance in future dollars, essentially applying a predicted higher rate of inflation. So that might not be $100,000 in today’s dollars.
What other options are there?
Higgins says your first port of call should be financial assistance through the government – which is summarised on the Moneysmart site.
That includes: jobkeeper ($750 a week), jobseeker (approximately $550 a week from 27 April) and the two one-off cash payments of $750 for some people. Individual states also have their own support payments.
Outside of the government, Higgins also said that many banks are offering hardship loans and you can ask for reduced bills from your electricity bill or credit card.
“Just take the time to review your current arrangements,” she says. “Are there things you can cancel? Am I doubling up somewhere on my insurance?
“You can call your electricity and gas companies to talk about what hardship arrangements they have available. And the same with your bank about your credit cards. Those companies have staffed-up those hardship areas and they are waiting for your calls.”
You can also take out other personal loans instead of dipping into your super. But Higgins adds that if you are in financial trouble, be aware that “taking more financial obligations is always stressful”.
For some, accessing super could be the most financially responsible option. “For some people this will be their only and their best option,” she says.
But you do not need to take out the maximum amount of $20,000. “You can just take out $5,000 or $3,000.”
Can I rebuild my super after I’ve taken some of it out?
Yes, but it might take a while to get back to the same level as before.
New money will go back into your super once you start working and being paid. You can also make additional contributions to replace the money you took out. To do so you’ll need to talk to your employer.
But, Dean warns that, with the way super investments work, “it will be a slow recovery”.
He and Higgins warn that taking your super out right now, after the stock market has fallen, could solidify some of your fund’s investment losses.
Higgins says that super funds are designed to be long-term investments and will recover from those recent losses over a number of years. But if you take money out now, you’re getting it at its lowest ebb.
“People use the example of selling a property at the bottom of the market,” Higgins says. “Do you want to do that? Some people, this is the money that they need, when they need it right now.”
