Assessing Impact of Pillaging Your Super Early

Super is an integral part of Australia’s three-pillar retirement income system.

In a nutshell, super is a tax-effective long-term investment structure to assist in accumulating wealth while working, which will then be used to generate income during retirement.

Providing support (benefits) in retirement, is a core purpose of super. And, death aside, the main conditions of release (situations in which we can access super) broadly operate in conjunction with this.

 

For example, these main conditions of release broadly centre on retiring from work and/or attaining certain ‘retirement’ ages. However, there are other conditions of release that allow access to occur earlier than this.

Below is a list of these conditions of release.

 

Conditions of release

Main conditions of release

  • Death.
  • Attainment of age 65 (regardless of whether retired or not).
  • Permanent retirement after attainment of preservation age.
  • Termination of a gainful employment arrangement after attainment of age 60.
  • Attainment of preservation age (and, not retired) and commencing a transition to retirement pension.

Other conditions of release

  • Permanent incapacity.
  • Temporary incapacity.
  • Severe financial hardship.
  • Compassionate grounds.
  • Terminal medical condition.
  • Lost member benefits under $200.
  • The First Home Super Saver Scheme (FHSSS).
  • Permanent departure from Australia by certain temporary residents.
  • Termination of gainful employment with employer-sponsor of super fund (and, balance under $200).

There is also a new, temporary condition of release, ‘COVID-19 early release of super’. This has been introduced to provide another possible financial resource for those financially affected by COVID-19.

COVID-19 early release of super

For eligible Australian and New Zealand citizens and permanent residents, they can apply to access up to $10,000 of their super before 1 July 2020, and up to a further $10,000 from 1 July 2020 to 24 September 2020.

An individual can be deemed eligible under this condition of release if they satisfy one or more of the following:

  • They are unemployed; or
  • They are eligible to receive a Farm Household Allowance, JobSeeker Payment, Parenting Payment, (partnered and single payments), Special Benefit, or Youth Allowance for jobseekers (unless they are undertaking full-time study or are a new apprentice); or
  • On or after 1 January 2020:
    • They were made redundant; or
    • Their working hours were reduced by 20% or more (including to zero); or
    • They are a sole trader — and their business was suspended or suffered a reduction in their turnover of 20% or more.

For eligible temporary visa holders, they can apply to access up to $10,000 of their super before 1 July 2020.

An individual can be deemed eligible under this condition of release if they satisfy one or more of the following:

  • They hold a student visa (subclasses 500, 570-576), and they have held it for 12 months or more, and they are unable to meet their immediate living expenses; or
  • They hold a skilled worker visa (subclasses 457 and 482), and are still employed and unable to meet their immediate living expenses; or
  • They hold a visa not mentioned above, for example, a working holiday visa, and they are unable to meet their immediate living expenses.

It’s important to note that the amount/s released is tax free and not required to be included in a tax return. And, the amount/s released won’t affect Centrelink and Veterans’ Affairs payments, or the JobKeeper Payment.

Applications can be made from 20 April 2020 via the ATO via the myGov website. While evidence doesn’t need to be attached to support an application, there are penalties for making false and misleading statements.

In terms of the uptake, according to the latest data released by APRA*:

  • The total number of early release applications received by super funds (from the ATO) is 1,080,310.
  • The number of early release applications paid is 830,024.
  • The total value of early release payments made to members is $6.3 billion.
  • The average value of early release applications paid to each member is $7,629.

Despite above, there are important considerations for those accessing, or contemplating accessing, super under this condition of release, for example, among other things, the potential long-term impact of doing so.

The potential impact can be highly variable, and specific to our circumstances. However, a recent analysis^ provides generalised estimates of this on super balance at retirement, and on super income in retirement.

Please see the below table for further details on this analysis.

The potential long-term impact of accessing super

under the COVID-19 early release of super condition of release

(Please note: These generalised estimates,

expressed in today’s dollars, are based on a range of assumptions#)

Current age (present self) 30 40 50 60
Retirement age (future self) 67 67 67 67
Accessing $10,000
Reduction in super balance $25,000 $18,000 $15,000 $12,000
Reduction in super income (fortnightly) $54 $41.50 $32.50 $26
Reduction in super income (annual) $1,400 $1,100 $850 $650
Accessing $20,000
Reduction in super balance $50,000 $39,000 $30,000 $24,000
Reduction in super income (fortnightly) $108 $83 $65 $52
Reduction in super income (annual) $2,800 $2,200 $1,700 $1,300

#Assumptions, for example:

  • Current tax and super laws remain unchanged.
  • Annual administration fees and costs of 0.5% of account balance per annum.
  • Investment earnings of 3% per annum after price-inflation and investment fees and tax.
  • Draw down of super via an account-based pension, and super balance lasts for 25 years.

Evidently, there is the potential to impact our retirement by accessing super under this condition of release. This may also give a general insight into the potential impact when withdrawing super under other conditions of release. 

So, if the need still exists, after reviewing all other possible financial resources and options, it may be prudent to view it as ‘borrowing’. A ‘borrowing arrangement’ between our present (borrower) and future self (lender).

It’s also worth considering mapping out a ‘repayment plan’ (e.g. in the form of regular super contributions), to follow once our present self is in a position to do so – keeping in mind, the ‘repayment plan’ may prove more difficult the longer it’s left.

Moving on from this, another important consideration, is any insurance arrangements in super. If the super balance reduces to below $6,000 due to the amount/s released, this may result in a loss of insurance.

This loss may include life insurance, total and permanent disability insurance, and income protection insurance – and, trauma insurance, if it was established prior to 1 July 2014.

So, again, if the need still exists, it’s important to be mindful of the amount/s applied for release, and subsequently released, under this condition of release, and the super balance that remains after doing so.

 

Moving forward

A core purpose of super is to provide support (benefits) in retirement – accessing and utilising the wealth accumulated while working to generate income to support us in our retirement years.

The main conditions of release broadly operate in conjunction with this purpose. However, there can be certain situations in which access to, and use of, super can occur earlier than this.

In these situations, it’s vital to understand the potential impact, such as that on our super balance at retirement, and on our super income in retirement, as well as our insurance arrangements in super.

Given this, if you are contemplating accessing super early, please consider seeking professional financial advice.

If you have any questions regarding this article, please contact us.

^Australian Government, APRA. (2020). COVID-19 Early Release Scheme: Early Release Scheme entity level reporting – 3 May 2020 period.

*The Conexus Institute, Actuaries Institute, & Super Consumers Australia. (2020). Media release: An information sheet relating to early access to super.

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