In such a short period of time, the influence of coronavirus has turned the world as we know it upside down. Many countries across the globe have put in place travel bans as well as strict quarantine measures, including self-isolation. These unprecedented times have created considerable uncertainty, particularly for those working in industries hardest hit by the self-isolation restrictions.
Some employees have been made redundant or stood down for an uncertain period. Those who are self-employed or business owners have seen substantial declines in income and turnover.
Under these circumstances, relying on external financial support is a necessity many Australians would’ve considered unthinkable just months ago. Thankfully, the Australian Government has taken unparalleled steps to boost the economy during this time, including the provision of a number of support measures to assist those financially dislocated by the coronavirus crisis.
One of the options available to financially impacted individuals is the early withdrawal of superannuation in the 2020 and 2021 financial years, assuming key criteria are met. This is a unique measure in that superannuation is typically inaccessible until ‘preservation age’ is reached (generally age 60 unless you were born before 1 July 1964). While there’s already special hardship conditions allowing earlier access, they’re often difficult to meet.
While the coronavirus has initiated the ability to temporarily access superannuation early, which seems like a terrific solution to those experiencing financial hardship, there are strategic aspects to consider before applying for withdrawal. Both temporary and permanent Australian residents can benefit from this measure, assuming key criteria are met.
Am I eligible to access my super early under the new coronavirus rules?
To successfully apply for the determination enabling early release, a citizen or permanent resident of Australia or New Zealand must satisfy any one of the following requirements:
- Be unemployed, or
- Be eligible to receive a job seeker payment, youth allowance for jobseekers, parenting payment (which includes the single and partnered payments), special benefit or farm household allowance, or
- On or after 1 January 2020:
- Be made redundant
- Have working hours reduced by 20% or more, or
- Have a business that was suspended, or has seen a reduction in turnover of 20% or more - this requirement is particularly applicable for sole traders/self-employed individuals.
Importantly, the amount withdrawn will not be taxed, nor will it count towards means-testing for other Government benefits.
How much super can I access under the Coronavirus Economic Response package?
Applications for the early release of superannuation must be made via myGov, and can be submitted during the following timeframes:
- For financial year 2020: 20 April 2020 – 30 June 2020
- For financial year 2021: 1 July 2020 – 24 September 2020.
Following application, it takes approximately three business days for an early release determination to be made by the Australian Taxation Office (ATO). Should this be favourable, the ATO will then notify the relevant superannuation provider/s and the funds released will be paid directly into the bank account nominated in the application. Too easy! Or is it?
…I thought super was meant for retirement?
Traditionally, yes, superannuation was put in place so Australians could build their own savings for retirement. To encourage people to do so the Government provides considerable tax relief on superannuation contributions and earnings.
However, due to the sheer scale of the economic shock coronavirus has created globally, its clear the Government wants to ensure the economy has the best opportunity to bounce-back once the coronavirus crisis is over. But, nobody knows when this will be.
To keep the Australian economy in healthy hibernation, it’s vitally important people still have some form of monetary backing. As a result, the difficult decision was made that needing to make provision now for Australians financially affected by coronavirus outweighed the policy goal of keeping superannuation benefits locked away until retirement.
So.. Should I access my super early under the new COVID-19 hardship measures?
First, there’s some logistics to consider.
As only one application can be made each financial year – with this remaining the case even if the amount initially withdrawn is less than $10,000 – being sure of the amount you need to access before completing the application is really important.
Second, the $10,000 accessible in each financial year can occur across multiple superannuation funds, so long as there is the account balance to do so. Where multiple funds are held, the choice of selecting which one/s to withdraw from is then needed. This sounds straightforward, yes? Not so much…
Where the superannuation fund account balance falls below $6,000 as a result of accessing superannuation early, and no contributions are being currently received by the fund, the account may be treated as an ‘inactive low balance account’ and transferred to the ATO. This will usually mean that any associated insurance cover is lost. Note: special exemptions apply for those in certain occupations and also those in some older superannuation schemes.
Insurance cover will also be lost where the entire fund account balance is extinguished. Insurance cover within superannuation can be a valuable benefit for many people and once it’s lost, it can be hard (as well as expensive) to regain. Where medical circumstances have changed, this can mean that an insurer may decline to provide new cover. Or, if they do, there may be strings attached. There may also be certain medical conditions or pastimes excluded from the cover; or an extra premium to be paid.
Careful consideration of this impact is key. If accessing superannuation early means you lose existing insurance coverage, you may need to decide if alternative insurance arrangements are needed now, and if not, whether there’s a reasonable prospect of them possibly being available at some future point.
Third, accessing superannuation early can turn what seems like a short-term gain into actual longer-term pain. This can happen for a few reasons.
Why do I need to consider longer term impacts of withdrawing my super early?
While $10,000 taken now may not seem like a big deal if you’ve got a few decades until retirement, due to the impact of compounding (or what can be called ‘the interest on the interest’), the actual reduction in your account over that time could be much more than you think. All things being equal, this means you’ll have less funds available for retirement than you otherwise would have.
At a very high-level, this effect can be shown in the following example.
Under current law, a 20-year-old today will normally have their superannuation inaccessible for at least another 40 years – until they reach 60. Where their balance is $25,000 now, assuming an annual compounding growth rate of just 3%, this will turn into $81,551 at retirement.
But, what happens if $10,000 is taken now? Well, there would only be $15,000 subject to the annual compounding rate of 3%, which turns into $48,931 at retirement – a difference of $32,620. So, taking $10,000 now means losing over three times that amount by retirement – and that’s huge!
Obviously, the above example doesn’t take into account market fluctuations, fees and charges or that extra contributions will usually be made throughout the 40 year period. But you get the drift, right?
Also, most superannuation accounts have dropped considerably since February 2020 when the possible outcomes of coronavirus became more widely known. By withdrawing superannuation now, you could be ‘locking in those losses’. That’s a little bit like selling a house at the bottom of the market. Not something you’d like to do, but action you’d absolutely take if you had no other choice.
Superannuation is meant to form the foundation of your retirement savings - that’s essentially what is was designed to do. Accessing it early can have significant future consequences.
The bottom line: Be sure to choose wisely.
We're here to help
We suggest you seek professional financial advice before making any financial decisions. To find out more about the early-release measures, contact Perpetual on 1800 011 022.
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