Retirement
What is the cost of withdrawing your super early?
As the ATO is inundated with requests for early access to super during the coronavirus pandemic, Peter Kelly, senior technical support manager of Centrepoint Alliance, discusses the longer-term implications for members.
What is the cost of withdrawing your super early?
As the ATO is inundated with requests for early access to super during the coronavirus pandemic, Peter Kelly, senior technical support manager of Centrepoint Alliance, discusses the longer-term implications for members.
As part of their COVID-19 stimulus plan, the Australian government announced changes to superannuation laws that will allow people to access up to $20,000 from super, spread over the 2019-20 and 2020-21 financial years, to help meet the financial challenges resulting from the coronavirus pandemic.
People could lodge their application for release of up to $10,000 for the 2019-20 financial year from 20 April 2020 and any amount approved for release is tax-free.
Just to recap, people eligible to access their super early can make an application through their my.gov account.
The Australian Taxation Office (ATO) must approve the early release of superannuation benefits. Once an application has been approved, the ATO will inform the applicant’s superannuation fund, which will then release the approved amount.
On 4 May, the government announced that superannuation funds had received 665,310 applications for early release.
Data from the Association of Super Funds Australia (ASFA) suggests the average withdrawal is around $8,200, with its analysis indicating that a substantial number of applicants have less than the maximum amount of $10,000 in their account.
But what is the downside of requesting the early release of superannuation?
Possibly the greatest risk is a reduction in savings at retirement. Withdrawing money from super early means that it is no longer invested and benefiting from the power of compound interest.
The Australian Securities and Investment Commission (ASIC), through their consumer website, moneysmart.gov.au has a calculator that allows a person to estimate the likely effect on their ultimate retirement saving of withdrawing super early. The calculator estimates the loss of retirement savings at age 67, in present day dollars and uses a number of basic assumptions that can be found on the website.
Using the moneysmart calculator, the following table illustrates the potential decline in retirement savings for different amounts withdrawn, based on different current ages and a planned retirement age of 67:
|
Amount withdrawn |
Current age |
|||
|
25 |
35 |
45 |
55 |
|
|
$5,000 |
$11,925 |
$9,705 |
$7,899 |
$6,429 |
|
$8,000 |
$19,080 |
$15,529 |
$12,639 |
$10,287 |
|
$10,000 |
$23,850 |
$19,411 |
$15,798 |
$12,858 |
|
$15,000 |
$35,774 |
$29,116 |
$23,698 |
$19,287 |
|
$20,000 |
$47 699 |
$38,822 |
$31,597 |
$25,717 |
While the impact on potential retirement savings is an important consideration, there is another risk that needs to be considered.
With the introduction of legislation in 2019 designed to help protect super fund members’ balances, restrictions have been placed on super funds being able to offer or maintain insurance cover in certain circumstances.
In particular, a super fund cannot continue to provide insurance cover for members in the following circumstances:
- A member has an inactive account – an inactive account is one that has not received a contribution, or a rollover from another superannuation fund, in the previous 16 months, or
- A member has a small account – a small account is an account with less than $6,000. If a person were to request early release of some of their superannuation savings, and their balance fell below $6,000, they will most likely lose their insurance held through their super account.
Where insurance is held through super and either of the above events occur, a person can opt in to retain their insurance cover. This involves making a written request to their superannuation fund to maintain their insurance.
Accessing super early as a result of the impact of the coronavirus will be an attractive option for many people. However, like many things in life, there may be an indirect cost in doing so.
For anyone thinking about taking advantage of the opportunity to access their super early, it’s important to speak to a professional first. They can provide an objective view of your financial circumstances and help you plan for both your short-term and long-term financial goals.
*Peter Kelly is a specialist in retirement strategies and solutions, self-managed super funds, and adviser engagement and training.
RELATED ARTICLES
Superannuation
Superannuation guarantee rate rises to 12 per cent as parental leave changes take effect
The superannuation guarantee rate has increased from 11.5 per cent to 12 per cent from Tuesday, with super contributions also being added to Commonwealth Parental Leave Pay for the first time. Read more
Superannuation
Rest's Sustainable Growth option achieves highest sustainability classification
Rest superannuation fund has achieved the highest sustainability classification for its Sustainable Growth investment option from the Responsible Investment Association Australasia. Read more
Superannuation
Aware Super slashes admin fees for retirees by up to 25 per cent
Aware Super has reduced administration fees for members with a retirement income account by up to 25 per cent and lowered the maximum annual fee. Read more
Superannuation
SuperAPI co-founder criticises Labor's superannuation tax as 'sneaky tax on young people'
The co-founder of SuperAPI has labelled Labor's proposed tax on superannuation balances above $3 million as a "sneaky tax on young people, tomorrow" disguised as a policy targeting wealthy retirees ...Read more
Superannuation
Election policies could reshape Australia's superannuation landscape, expert warns
Competing superannuation policies from Australia's major political parties could have significant implications for investors and retirees, according to a financial expert. Read more
Superannuation
Industry leaders weigh in on concessional super tax as Budget confirms $55bn investment
Changes to the taxation of superannuation earnings and contributions have drawn mixed responses from financial and payroll sector leaders, as the Federal Budget confirms over $55 billion in ...Read more
Superannuation
Call for indexation on super tax cap as $3m threshold draws criticism
A senior executive in the superannuation technology sector has criticised the Federal Government for failing to index the proposed $3 million superannuation tax cap, arguing the measure will unfairly ...Read more
Superannuation
Rest members back calls for fairer superannuation rules ahead of Federal Budget
Rest has called on the Federal Government to implement superannuation reforms aimed at improving fairness across the system, after member survey results showed strong support for a range of proposed ...Read more
Superannuation
Superannuation guarantee rate rises to 12 per cent as parental leave changes take effect
The superannuation guarantee rate has increased from 11.5 per cent to 12 per cent from Tuesday, with super contributions also being added to Commonwealth Parental Leave Pay for the first time. Read more
Superannuation
Rest's Sustainable Growth option achieves highest sustainability classification
Rest superannuation fund has achieved the highest sustainability classification for its Sustainable Growth investment option from the Responsible Investment Association Australasia. Read more
Superannuation
Aware Super slashes admin fees for retirees by up to 25 per cent
Aware Super has reduced administration fees for members with a retirement income account by up to 25 per cent and lowered the maximum annual fee. Read more
Superannuation
SuperAPI co-founder criticises Labor's superannuation tax as 'sneaky tax on young people'
The co-founder of SuperAPI has labelled Labor's proposed tax on superannuation balances above $3 million as a "sneaky tax on young people, tomorrow" disguised as a policy targeting wealthy retirees ...Read more
Superannuation
Election policies could reshape Australia's superannuation landscape, expert warns
Competing superannuation policies from Australia's major political parties could have significant implications for investors and retirees, according to a financial expert. Read more
Superannuation
Industry leaders weigh in on concessional super tax as Budget confirms $55bn investment
Changes to the taxation of superannuation earnings and contributions have drawn mixed responses from financial and payroll sector leaders, as the Federal Budget confirms over $55 billion in ...Read more
Superannuation
Call for indexation on super tax cap as $3m threshold draws criticism
A senior executive in the superannuation technology sector has criticised the Federal Government for failing to index the proposed $3 million superannuation tax cap, arguing the measure will unfairly ...Read more
Superannuation
Rest members back calls for fairer superannuation rules ahead of Federal Budget
Rest has called on the Federal Government to implement superannuation reforms aimed at improving fairness across the system, after member survey results showed strong support for a range of proposed ...Read more
