Covid and early access to your super

Covid and early access to your super

Covid-19 has certainly impacted our finances significantly and many have resorted to accessing a portion of their Super early. Access to our super funds has always been an option for those facing financial hardship or on compassionate grounds, and although many feel that this was necessary for them now – at what cost later?

This new rule enables individuals to access up to $10,000 in both the 2019/20 and again in the 2020/21 financial years meaning they can withdraw a total of $20,000 from their retirement savings.

Those eligible are:

  1. Unemployed
  2. Eligible to receive a job seeker payment, youth allowance for jobseekers, parenting payment (including the single and partnered payments), special benefit or farm household allowance
  3. On or after 1 January 2020:
  • You were made redundant
  • Your working hours were reduced by 20% or more
  • If you are a sole trader and your business was suspended or your turnover has reduced by 20% or more.

To make things a little easier, individuals will not need to pay tax on the amounts released and it will not affect Centrelink or Veterans’ Affairs payments.

The type of superannuation fund you have, and its phase type will also determine your eligibility, as only those with an accumulation and not pension accounts can apply. Those with an SMSF will need to contact the ATO, and make arrangements through myGov to determine their eligibility.

However, there are some things to consider before you decide to take this step, and I would highly recommend having a discussion with a financial advisor before you apply to make sure you are fully aware of the ‘cost’ to your end balance.

Firstly, find out if you can access other sources of finances or relief.

There are a number of Government payments available:

  • Income support payments - crisis payments and a temporary fortnightly $550 coronavirus supplement
  • Household support payments - two automatic $750 Economic Support Payments
  • JobKeeper Payment - $1,500 a fortnight may be available to employers to keep paying eligible employees whose hours have been cut

Contact your bank as most have set up a financial hardship team to help individuals adjust their current obligations to ease the pressure. This may involve refinancing your loan or temporarily halting your repayments till you get back on your feet.

Secondly, check if you have income protection insurance coverage. This may be held inside or outside of your super fund, so have a look at what their requirements are for a possible payout.

If you still need extra funds then you need to realise that withdrawing $10,000 - $20,000 form your super balance will significantly impact your retirement lifestyle.

Covid has significantly impacted super fund balances with significant falls in share prices. This means that any withdrawals will be made by selling your assets as a lower price than what they were last year. It will also reduce the funds you have available to re-build your balance as share prices return to their pre-covid rates.

Additionally, withdrawals may impact the level of insurance cover provided through your fund. As more than 70% of Australians hold life insurance through their super fund, if you have a low balance and you withdraw most or all of it, you may lose your life insurance and income protection cover.

Lastly, calculate the amount of money you need to have available to fund your retirement as any withdrawals now will lower the amount you have available then. This will be different for everyone depending on their age, income level and desired age of retirement.

For example, for those with a conservative or balanced portfolio;

A 35-year-old who wants to retire at 67 who withdraws $10,000 now will have $19,411 less in retirement in today’s dollars. However, if they were 30, their retirement savings would be reduced by $21,516.

But if they decided to withdraw the full $20,00 over the two financial years then a 25-year-old withdrawing could lose $58,000 from their super balance and a 35-year-old $45,000. That’s close to a year’s income for some.

However, if you have a growth or high growth super fund, these costs can be much higher- as in double!

For those that do withdraw some money need to carefully plan how they will spend it over the next 6 months and not just for the short term. Covid is going to be with us for a bit longer and we need to carefully budget to ensure we can see our way through. For many, this will require you to develop your financial literacy so that you will have the freedom to achieve your life goals in the future. See our range of videos that are designed to help you through the financial decisions you may face.

Accessing your super funds should be your LAST resort as although it is your money, touching it now will impede your life when you are not in a position to continue earning.