Nearly half a million Aussies have withdrawn their super early. But is it such a good idea?
The ATO says 456,000 Australians have already taken advantage of the Federal Government’s early super access scheme, totalling $3.8 billion in claims.
Rolled out in March, the scheme allows Australians who have lost their job as a result of the coronavirus pandemic to withdraw $20,000 of their super, in two tax-free tranches over this financial year and the next.
The large uptake speaks to the financial hardship that many are facing right now, but experts are warning that early withdrawal of super could cost Australians tens of thousands of dollars in the long run.
“Whilst accessing your super right now might provide some relief if you’re facing significant financial pain, there should be a big, red ‘Proceed With Caution’ sign warning that your future-self will pay the price for this move,” said BDO superannuation partner Mark Wilkinson.
“Although $10,000 doesn’t sound like a lot, for a person who is 25 who loses their job due to Covid-19, that $10,000 today could be worth $160,000 when they retire in another 40 years,” he said.
The move has also drawn strong criticism from Labor's Shadow Assistant Treasurer Stephen Jones, who has urged Australians to seek professional advice before making any hasty decisions about their super.
"Our number one issue is to ensure that people get financial advice. Accessing your super is the right answer for some people but not for everybody,” he said.
Recently, ASIC loosened some of the restrictions tax agents and financial advisers face to help streamline the provision of advice around early super release. Advice fees have also been capped at $300.
What should you know before withdrawing your super early?
It could result in less money in retirement
Of course, the immediate consequence of accessing your super now is it will shrink your balance by the amount withdrawn. But as mentioned above, it will also likely put a significant dent in your retirement savings.
This is because your original investment and the interest it earns are continuously reinvested by your super fund. When you leave your balance untouched, you can generally expect it to snowball over time.
But by withdrawing even a small amount, all the interest it could potentially accrue disappears. And even if you commit to making extra contributions once you’re in a more financially stable position later on, there’s always the chance that you’ll have already missed out on a market surge, which brings us to the next point...
Markets are currently at a low point
The coronavirus pandemic has caused widespread uncertainty, and investment markets don’t respond well to uncertainty. Currently, they’re at the lowest point they’ve been in years. If you were to withdraw a portion of your super now, the assets your fund owns on your behalf will be sold at lower prices, and any losses your investment has seen over the past few months will be locked in.
You could lose your insurance cover
If you’re one of the 70% of Australians that have life insurance through their super, you’ll need to think carefully before making any withdrawals. A depleted balance (one that’s been completely withdrawn) might prompt your super fund to close your account, thereby cancelling your insurance as well.
There’s more leeway, however, if you’re only withdrawing a portion of your balance. While super providers are required to cancel insurance cover on accounts with less than $6,000 (as well as ones that haven’t received any contributions for at least 16 months), this shouldn’t apply to accounts that have dipped below that amount following a withdrawal.
Watch out for scams
One final thing to keep in mind is that superannuation-related scams are quite popular at the moment. Scammers have been known to email, call and text Australians, often claiming to be from the Australian Taxation Office or Centrelink, to try to poach personal details.
If you’ve decided to withdraw part of your super balance, know that the ATO is managing the release of funds via the myGov website and no third party needs to be involved. Don’t be fooled by unprompted requests for personal information, and try to avoid following any hyperlinks to the myGov website (in case they redirect to a fraudulent site).
While drawing on super funds can help build a buffer against further financial distress, Australians should keep in mind that there are several other options available to them. For an overview, visit our coronavirus financial guide.