posted in: Coronavirus

Accessing $20,000 from your super, is this the right move?


Following the unfolding of recent events, the Federal Government announced superannuation holders can access up to $20,000 in super funds, $10,000 before June 30th 2020 and $10,000 in the following financial year.

The Australian Tax Office (ATO) has announced that those who withdraw from super due to COVID-19 will not be taxed on the amount released and will not have to include this in their personal tax return.

Who qualifies? And what does the process involve?

The criteria eligibility is below:

You apply for access through the ATO and the process is explained below. The ATO can review your Centrelink information to justify whether you are facing financial hardship.

  1. Check your balance of your super to see if this is viable for you
  2. Visit the MyGov website
  3. Check that you meet the criteria to withdraw
  4. Select your Super account
  5. Specify the amount you wish to withdraw (up to $10,000) and your bank account number
  6. The ATO will process and will notify both you and your superfund
  7. Your Superfund will deposit the money into your nominated account

Will this affect my insurances paid from superannuation?

You may have insurance premiums that are paid through your super account. If you decide to withdraw early, your insurance may be affected.

If you withdraw from your superannuation and it leaves you with a $0 balance, your account could be closed. This means that your cover will be cancelled, from the day that the account was closed. Additionally, withdrawing funds will reduce your super balance and this may impact the ability for the fund to meet your ongoing insurance premiums.

In 2019, laws were introduced that help your super balance from diminishing due to insurance premiums. “Protecting your super package” is a law that forces your provider to cancel your insurance if you do not contribute for 16 months. This means, that if you cannot make any contributions to your account for 16 months, the insurance could be cancelled.

 How will my retirement be impacted?

There has been much discussion around the impact of this early withdrawal and how it may affect your future retirement savings.  The modelling below was completed by Industry Super and explains the difference each age bracket will have in retirement if you withdraw the maximum $20,000 from your superannuation account.

Scenario Models

Age Starting balance Super taken Difference in retirement*
25 $20,000 $20,000 $95,696
30 $40,000 $20,000 $79,393
35 $60,000 $20,000 $65,868
40 $79,000 $20,000 $54,647
45 $95,000 $20,000 $45,338
50 $109,000 $20,000 $37,614

Crystallising losses

Another thing to consider is that many Australian’s have their superannuation invested in growth assets like shares or pre-defined investment strategies such as the balanced investment option, which by default has a high percentage of Australian and International shares. By taking cash out now, superannuation holders will be locking in losses.

So, does that mean withdrawing from your super is a bad move? Not necessarily

Every person’s situation is unique and their reasons for withdrawing cash from their superannuation will vary. Whilst the above numbers indicate withdrawing funds early from super will be detrimental in the long term, this does not necessarily mean it’s the wrong move.

Take for example a 40-year homeowner who has been placed on the JobKeeper scheme and is unsure of their employment position once restrictions begin to lift and the government handouts cease. Based on the above numbers they will be $45,338 worse off in their super at retirement, however what would be the opportunity cost if they were forced to sell their house in the next 12 months because they were in between jobs and ran out of money?

Let’s assume this same person owned a $1,000,000 house that they were forced to sell due to their insufficient cash buffer. It would cost them approximately $20,000 in legal and agents fees to sell, plus should they wish to repurchase that same property in the future for $1,000,000, they would be up for another round of legal fees and stamp duty – approximately another $40,000 (stamp duty varies from state to state). This does not include the lost opportunity cost should the property increase in value whilst they are out of the market. When comparing the lost value in super versus losing their home and then repurchasing, this person would be significantly worse off overall.

Can I catch up my superannuation if I withdraw?

If you have withdrawn funds from super and your financial situation begins to stabilise, you can make additional super contributions up to the annual concessional cap of $25,000 (this cap includes any compulsory employer contributions that are made). Traditionally, these additional contributions would have to be made via your employer (salary sacrificing), however it is now possible to deposit money straight into your superannuation fund and receive a tax deduction in your personal tax return. Under the new rules you can go back and catch up any unused contributions dating back to the 1st July 2018, up to a maximum of five years prior, provided your total super balance doesn’t exceed $500,000.

Disclaimer

The information in this article is general in nature and does not constitute personal advice. For some people accessing their superannuation could be the right move and for others it could prove detrimental. Please also note that the ATO have indicated there could be penalties for individuals who access their superannuation early, without a genuine reason. We recommend you speak to the Montara Wealth team or your trusted advisor before accessing your super.

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