Amid the raft of measures announced by the Commonwealth Government last month, one of the more contentious was the decision to allow limited access to superannuation benefits to people who are ‘under-age.’ This change took effect from Monday of this week.
Normally, unless a person becomes disabled, they need to wait until they reach a particular age, known as the ‘preservation age,’ before they can access their super. The actual age varies according to a number of variables, but the following table from the ATO shows the typical range of preservation ages:
|Date of birth||Preservation age|
|Before 1 July 1960||55|
|1 July 1960 – 30 June 1961||56|
|1 July 1961 – 30 June 1962||57|
|1 July 1962 – 30 June 1963||58|
|1 July 1963 – 30 June 1964||59|
|From 1 July 1964||60|
Changes have been introduced to allow a person to withdraw up to $10,000 between now and 30 June and/or $10,000 between 1 July and 24 September 2020. Altogether, a person could withdraw anything up to $20,000. At least one of the following conditions must be met for anyone wishing to withdraw some or all of this money:
- Eligibility for the Commonwealth’s new ‘Jobseeker’ payment (which may include people who have only been stood down);
- Redundancy since 1 January 2020;
- Reduced working hours (by 20% or more) in 2020; or
- For sole traders, reduced turnover (by 20% or more) or the business has been suspended.
In order to make the withdrawal, each fund will have some procedural elements that need to be borne in mind. The ATO will also involve itself. It is definitely not as simple as deciding you need the money.
Many media commentators have been quick to criticise this initiative. They argue that this is a bad policy and people should not make the withdrawals. This criticism is too general. Whether you should make such a withdrawal depends on your unique circumstances. Early withdrawal is a good idea for some, but not for others.
The main argument against early access is that people will ‘miss out’ on the wealth creation that would normally be expected if they retained the money within their super fund. This effect is worse the younger the person is, as their super investment could be expected to compound over a longer timeframe. This view can be correct, but it is actually a bit simplistic. Whether making a withdrawal has a negative impact on your wealth depends entirely on what you do with the money after you withdraw it. If you simply spend the money on lifestyle then, yes, your wealth will be reduced over the long-term.
But, then, that is the case whenever you spend any money on lifestyle, regardless of where it came from. Once money has been spent, it is gone for good.
But not all money is spent on lifestyle. In the case of money withdrawn early, if you were to use the money in a way that improves your long-term wealth prospects, then an early withdrawal might make sense. Examples where early withdrawal might actually improve your overall position include where you have a mortgage or personal loan and the money withdrawn will be used to pay down this debt. Paying down this debt will save you interest for the remainder of the life of the loan, which is another way for you to enjoy the benefits of compounding that you miss out on within your super fund. If the debt was personal, then the interest you are currently paying needs to be ‘grossed up’ due to the fact that it is not tax deductible. Paying off debt will mean freed up cash flow into the future because the interest payments will be less. This freed-up cash flow could even be put towards ‘reimbursing’ your super fund in future years.
In a similar vein, many younger people who are yet to buy a property lament that superannuating for their retirement is not as important to them as buying for a house to enjoy before they retire. Money withdrawn from super could be used towards acquiring a deposit for that first home.
We could see a strategy like this working particularly well if you are a member of a couple in which one of you qualifies for early access to super. Remember, to qualify you basically need to have lost at least some of your income from your job. But if that only happens to one of you and the other partner is still working and you are jointly saving to buy a home, then you may find that you can live off one income and use the money withdrawn to add to your home deposit or retire some debt. The loss of the income need not have such a negative impact on your saving or debt repayment plans.
The point is that there is no hard and fast rule that says that super should or should not be withdrawn in all cases. Whether an early withdrawal makes sense depends on all of your circumstances, both now and into your future. Helping people identify those circumstances is what we do. So, if you think you might qualify for early release, why not give us a call and we can talk through the pros and cons of early release in your particular case.