Australians who have been significantly affected by COVID-19 can access up to $20,000 of their super in 2020. For people who have exhausted their other options, any extra money will come as a welcome relief. But withdrawing your retirement savings early comes with a cost. Here are six things you should consider first.
Giving Australians the ability to temporarily access their super in times like these make a lot of sense. For some people, the ability to withdraw their savings early will mean they can put food on the table or escape domestic violence. But for those who are not in immediate financial stress, it’s worth considering all your options before dipping into your retirement savings. Withdrawing your super early should be a last resort.
So, how does it work? From 20 April, Australians who have been significantly affected by COVID-19 will be able to apply to withdraw up to $20,000 of their super tax-free. We’re here for our members and we want to get this money to people who need it as quickly as possible. For more information, check out our FAQ on the topic. In the meantime, here are six things to consider before deciding to apply for early release of your super.
1. Check out the latest government assistance
The Federal government has committed a record amount of public spending to address the COVID-19 crisis. There are many payments you may be eligible for, including the $550 per fortnight Coronavirus supplement (which effectively doubles the JobSeeker payment, formerly called the Newstart Allowance) and the $1,500 fortnightly JobKeeper payment. On top of that, childcare is free for the next six months, the government has allocated $1 billion to support domestic violence victims and there is a moratorium on residential rental evictions for the next six months.
2. Negotiate, negotiate, negotiate
Renters and landlords have been encouraged to “work it out” by Prime Minister Scott Morrison. Policy measures vary across Australia's states and territories. In NSW, the state hardest hit by COVID-19, the state government has announced a $440 million rental assistance program. To date, Queensland, Western Australia, Tasmania and the ACT have also announced measures to assist renters. Those with a mortgage may be able to apply for relief from their bank, with many financial institutions announcing a temporary freeze on mortgage payments for affected customers. It could also be worth speaking with your utility providers to see if they will also provide some relief.
3. $20,000 now could be $120,000 in retirement
Money is worth more in the future than it is today. Case in point: the number crunchers at Industry Super Australia have found that a 25-year-old who takes $20,000 out of their super now could be $120,000 worse off in retirement. Compound interest, or earning interest on interest, is a powerful way to generate assets for your retirement. By withdrawing money from your super now, you’re effectively robbing your future self.
4. Withdrawing super means selling shares
Most people’s super funds are invested in the stock market, and it’s fair to say that everyone’s super has taken a hit in the past month. While global markets have bounced back from their lows, March 2020 was the worst month since October 1987. Investment professionals tell us that in the long term markets will recover, but selling out now (which is what you’re doing by cashing out your super) is effectively ‘crystallising losses’.
5. What about my insurance?
Another thing to keep in mind is that withdrawing super early could impact the amount of insurance you have. If you deplete your super account completely you will lose any life insurance attached to it. It’s also worth considering that under new regulations you could be automatically ‘opted out’ of insurance if your account falls below $6,000.
6. Make a commitment to your super
If you do decide to go ahead and access you super early, make a commitment to increase your contributions in later years to ‘catch up’. And while you’re thinking about your super, consider consolidating it all into one place. You’ll save lots of money over the long term by paying fewer fees.
Want to learn more? Check out our recent Facebook Live conversation with financial adviser Natallia Smith from TruWealth. Natallia talks about how to access your super early and answers some questions from our social media community.