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The cost of early super access

Written and accurate as at: Apr 14, 2020 Current Stats & Facts

https://www.vanguardinvestments.com.au/retail/ret/articles/insights/research-commentary/retirement-and-superannuation/early-super-access.jsp 

High among the range of assistance programs announced by the Federal Government in recent weeks was a measure enabling eligible individuals to have early access to their superannuation.

Here's how the Government has outlined the rules around the limited, early superannuation access measure.

In a nutshell, previously unemployed individuals and those made redundant as a result of the Coronavirus, or who have had their working hours reduced by 20 per cent or more, can apply to access up to $10,000 of their super in 2019-20, and a further $10,000 from 1 July 2020 until 24 September 2020.

Sole traders, where their business has been suspended or if there has been a reduction in their turnover of 20 per cent or more, can do the same.

Individuals will not need to pay tax on amounts released and the money they withdraw will not affect Centrelink or Veterans' Affairs payments.

Those eligible and who wish to take up the superannuation withdrawal initiative can apply directly to the Australian Tax office via the MyGov website.

Individuals will need to certify they meet the relevant criteria, and the ATO will then issue a determination and provide a copy to the member's superannuation fund so the payment applied for can be released.

This is actually the second measure in recent times to allow early access to superannuation savings.

The first was the First Home Super Saver Scheme, introduced in 2018, which allows first-home buyers to access up to $15,000 per year, and $30,000 in total, from their superannuation contributions to use as a home loan deposit.

Is early access a super opportunity?


In the current uncertain economic environment, where unemployment levels have soared, accessing one's retirement nest egg early could be enticing.

But keep in mind that most superannuation account balances have been hit very heavily by the sharp downturn in global financial markets. By withdrawing more savings, there will certainly be a big opportunity cost when markets and superannuation returns rebound.

It's also important to consider that there are now other financial relief options on the way that were not available at the time the superannuation measure was unveiled.

The Government's superannuation access measure was announced more than a week before its $130 billion stimulus package, and various payment relief initiatives announced by financial institutions, which should negate the need for individuals to access their savings.

The centrepiece of the stimulus package is a $1,500 fortnightly "JobKeeper" payment for impacted employees, up to a period of six months, and expanded welfare support payments for job seekers.

The first payments under JobKeeper won't be received by employers until the first week of May. However, the process of applying for a superannuation account withdrawal through the ATO and then receiving a payout from one's fund is also likely to take weeks.

Seek professional advice


In its statement announcing the latest measure, the Government said this: "While superannuation helps people save for retirement, the Government recognises that for those significantly financially affected by the Coronavirus, accessing some of their superannuation today may outweigh the benefits of maintaining those savings until retirement."

However, as with any major investment decision, it's very important to seek professional financial advice rather than acting in haste without a proper plan.

The early superannuation access measure is no different, because there could be major negative repercussions.

That entirely depends on one's investment goals and their personal and financial situation.

For example, in the case of someone close to retirement, but not quite at the point of having triggered a condition of release, such as reaching their preservation age, the early release measure may be an advantage.

Under the announced measure, if they qualify, they could tap into some of their accumulation account tax free before formally stopping work and switching into pension mode.

Individuals can already withdraw tax-free lump sums from their superannuation anyway when they actually reach retirement.

Yet, for those with a much longer way to go before retirement, accessing one's superannuation account now will almost certainly be very costly over the long term.

Counting the retirement cost


To illustrate how costly a large superannuation withdrawal could be, we've done some modelling.

 Cost to retire

Let's take a person aged 30, on a $60,000 per annum salary, who has accumulated about $25,000 in their superannuation account over time from employer Superannuation Guarantee (SG) contributions, personal contributions and investment returns.Their current balance is now down about 25 per cent from where it was before the latest market drop, so they're already in a superannuation loss position.

But, assuming their salary rises progressively to $100,000 over the next 20 years, attracting higher SG contributions, and assuming a long-term total annual investment return of 8 per cent on the compounding balance, the individual's balance at age 50 would be around $400,000 if left untouched.

Compare that with what would potentially happen if the same person withdrew $20,000.

Using all the same criteria as above, except that the individual takes up the Government's measure and withdraws $10,000 before June 30 this year, and another $10,000 in the new financial year, this would be the impact over the same period.

Their account balance would drop to just $5,000. To get back to their starting point of $25,000 would take almost four years, based on annual SG contributions of $5,205 based on their $60,000 salary.

Assuming their salary increases by $10,000 every five years, lifting their employer 9.5 per cent contributions accordingly, by age 50 they will end up with just under $310,000 – about $90,000 less.

That gap keeps widening over time. The individual that didn't withdraw anything from their super would end up with more than $1.53 million by age 65. But their final balance would be about $300,000 less ($1.24 million) if they did pull out $20,000 at age 30.

They're hypothetical numbers, of course, but very realistic based on the recorded long-term total average returns for superannuation over multiple decades.

Conclusion


Withdrawing savings from one's superannuation may seem like a logical move (and depending on individual circumstances perhaps a necessary one), especially for a younger person.

But there are other support options available that have no long-term financial consequences. These should be explored as a priority.

It's also vital to seek financial advice before considering the superannuation withdrawal option.

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