Early access to superannuation: what are the risks?

We are experiencing challenging times and extreme levels of uncertainty at present and while Canberra’s early release of superannuation initiative will benefit many, here we explain why it’s important to exhaust other options first.

Early Release of Superannuation Scheme

In March, as an economic response to the coronavirus, Canberra announced early access to $20,000 in superannuation for those whose employment income was negatively impacted by COVID-19.

The early access initiative allows individuals to access up to $10,000 tax free from their superannuation funds in the 2019/20 year and a further $10,000 in the 2020/2021 year.

To be eligible for early access, individuals must be:

  • Unemployed; or
  • Eligible to receive: the Job Seeker Payment, Youth Allowance for Job Seekers, the Parenting Payment, Special Benefit of Farm Household Allowance; or
  • On or after 1 January 2020
  • Were made redundant; or
  • Had their working hours reduced by 20 percent; or
  • If the individual is a sole trader – their business was suspended or there was a reduction in turnover of 20 percent or more.

Prior provisions for individuals seeking early access to superannuation were centered around those experiencing severe financial hardship/bankruptcy, were incapacitated in a permanent sense, temporary residents of Australia, had balances below $200 or were participating in the first home buyers scheme.

The risks of accessing superannuation early

The early release initiative is appreciated in these unprecedented times and may hopefully allow employees and self-employed individuals to remain afloat through this pandemic.

However, it is important individuals understand the consequences of removing large sums from their superannuation balance and the impact it may have on their quality of life in the future.

One risk of releasing superannuation early is having less super at retirement. Due to compounding interest and depending on the account holder’s age (the younger the account holder, the greater the impact) an amount of $20,000 now is likely to be far greater by the time one retires and accesses their superannuation account.

For example:

Bill is an Optometrist and is 35 years of age. His working hours have reduced by more than 20%, he therefore qualifies for the Job Seeker Payment.

Whilst he receives the payment, there are commitments Bill is struggling with and considers withdrawing the $20,000 from his superannuation balance over the two financial years.

Bill’s current superannuation balance is $150,000.

If we assume earnings at 6% per annum after fees and no contributions, his balance will be approximately $682,000 at the age of 60.

If Bill withdraws the $20,000 and reduces his superannuation balance to $130,000, assuming the same earning rate and no additional contributions, his balance will be approximately $591,000 at the age of 60.

Therefore, withdrawing the $20,000 now has affected his future superannuation retirement balance by approximately $90,000. 

In addition, with the market drop, individuals may redeem their superannuation at a low and miss out on potential growth and profits when investment markets start to recover.

Lastly, for individuals with low super balances which might be funding insurance premiums, withdrawing the cash means they might find their super balance without enough funds to maintain their insurance premiums. Hence these covers may be cancelled, leaving an individual underinsured.

This is especially relevant given legislation that was released from 1 April 2020, where default Death, Total and Permanent Disablement and Income Protection cover could automatically be cancelled by the super fund if the account balance is below $6,000.

For these reasons, consider other avenues before withdrawing funds from superannuation.

Other options may be freezing mortgage repayments or insurance premiums as some banks and insurance companies have recently announced these opportunities.

Early access to superannuation: what are the risks?

Alessandra Forero

Alessandra is a William Buck Wealth Advisor. With over 10 years industry experience, she aims to ensure high quality client service across strategic advice areas. When she is not at work, Alessandra is a mother to her little boy and has a passion for Flamenco dancing.

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