Time to read : 4 Minutes
When it comes to accessing your super, the rule is simple. You can only access it:
once you turn 65, or
you reach your preservation age (which differs depending on when you were born) and retire or begin transitioning into retirement.
But there are certain instances where you may be eligible to access your super early.
It could be that illness, redundancy, natural disaster or marriage breakdown have hit your finances hard, leaving you struggling to keep a roof over your head.
In these situations, money set aside in super could seem like a much-needed helping hand.
But just because you can access it doesn’t necessarily mean you should. So let’s take a look at when you may qualify and what the long-term implications of dipping into your retirement savings could mean to your finances.
When can you access super early?
The ATO only allows early access to super in a few particular circumstances:
Compassionate grounds (such as for essential medical treatment for yourself or a dependent, palliative care, death/funeral expenses, or to prevent foreclosure on your home).
Terminal illness (paid out as a tax-free lump sum).
Severe financial hardship (applications are lodged directly with your super fund).
Temporary incapacity due to any health or medical condition making it difficult for you to work (may be claimed as income protection you have in your super as well as or instead of early access).
Permanent incapacity when you have any health or medical condition that’s likely to permanently stop you from working (may be claimed as TPD you have in your super as well as or instead of early access).
A super balance of less than $200, either from terminated employment or if you find a lost super account. You can also simply consolidate this money into your current super fund.
Note: you will need to meet strict eligibility conditions and provide documented proof.
How does early access to super affect your retirement savings?
The important thing to consider about accessing your super early is that it can cost you twice:
Your super balance decreases by the amount you withdraw.
You also lose the interest/earnings that money would have made between now and when you retire.
Let’s say you take out $10,000 at age 40 and don’t “repay” it. Assuming 7% investment growth and 3% inflation (using historical annual averages), by age 67 that money would have been worth $62,139 (or $28,834 in today’s money without adjusting for inflation). So, that $10,000 withdrawal actually costs you $62,139.
But until recently, super funds were averaging growth rates closer to 11%. Using this scenario, that same $10,000 withdrawal now loses a hefty $167,386 (or $79,881 not adjusting for inflation).
Be aware: if you sell your investments inside your super fund when the market is volatile, has a downturn or crash, what was worth $20,000 has fallen to $10,000. You are effectively selling down double the original amount of your investment to get what you need, making your overall outcome even worse.
How can you repay super funds that have been withdrawn early?
Before looking to repay early super withdrawals, it’s wise to address the reasons for needing to access those funds in the first place. Ideally, you don’t want to find yourself repeating the process again in future.
Have a working savings and investment plan, ensure your estate planning is up to date, and most importantly, check that you have proper insurance cover and an emergency fund in place – should disaster strike twice.
While a repayment system doesn’t exist as such, you can look at rebuilding your super with voluntary contributions. And to get the biggest bang for your buck, look at the super contributions rules.
Depending on your personal circumstances, you may be eligible for:
government co-contributions for low and middle income earners
spousal contribution tax offsets
salary sacrificing super arrangements.
Most important of all, start ASAP. The sooner you begin making voluntary contributions, the more time that money has to grow. If you need to, start with small ones and then build up gradually as your financial situation recovers.
Consider making contributions permanent
Here’s some extra food for thought: once you have repaid the amount you withdrew, why not make those contributions into your super permanent. This will help you recover lost investment earnings while that money was absent from your super.
Say you invested $10,000 a year from age 40 (around $200 per week), which can be your super from your employer and/or extra you put in, again with 7% investment growth and 3% inflation. By age 67, your super balance would have an extra $744,838 (or $470,842 not adjusted for inflation).
If it continued delivering 11% annual returns, you’d have more than $1.4 million extra ($1,430,786 to be exact, or $873,508 in today’s money).
Bottom line
Superannuation is designed to help fund your retirement. Any early access to it, no matter the reason, will ultimately have an impact on those retirement savings.
Prevention is better than cure, so wherever possible, explore alternative options to early access to your super: insurance claims, hardship provisions, loan refinancing, debt repayment plans, cost savings – there are options available.
If there is no alternative, or you have already accessed some of the funds, make a plan to repay those funds as soon as you can to maximise relevant contribution benefits. That way, you can make up the shortfall as quickly and cost-effectively as possible.
Your financial adviser and accountant can be valuable sources of support in helping you determine your options and ensuring your plan works hard for you – both now and in retirement.
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Disclaimer
The information in this article is of a general nature only and does not constitute personal financial or product advice. Any opinions or views expressed are those of the authors and do not represent those of people, institutions or organisations the owner may be associated with in a professional or personal capacity unless explicitly stated. Helen Baker is an authorised representative of BPW Partners Pty Ltd AFSL 548754.
