What is the cost of withdrawing your super early?

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calculator, the following table illustrates the potential decline in retirement savings for different amounts withdrawn, based on different current ages and a planned retirement age of 67:

Amount withdrawn	Current age
Amount withdrawn	25	35	45	55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.

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