Time to read : 4 Minutes
There’s been some talk of mortgage holders accessing their superannuation early, to help manage the highest home loan interest rates (and living costs) in a decade*.
This is something that was allowed during the pandemic as well. According to the Australian Prudential and Regulatory Authority (APRA), over 3.5 million applications were made for early Super withdrawal during the pandemic, “and a total value of $36.4 billion” was withdrawn.
On the face of it, early access to your Superannuation might seem like a lifeline if you’re struggling with crushing repayments, but is risking your retirement the right solution for you?
A Families in Australia survey^ looked at those who’d drawn down their Superannuation early, and found that:
“Those who accessed their superannuation were more likely to report feelings of concern about their family's current financial situation, as well as their future financial situation. For some, concerns about the future were related to the impact that drawing down their superannuation savings would have on their income in retirement.”
The survey also found that those accessing their Super early “did so because of an immediate financial need.”^
What are the risks of early access to your Super?
Superannuation is intended to provide you with income in your retirement. While you can access your Super earlier under specific conditions, there are risks in doing this.
It’s tempting to consider accessing your Super to assist in managing immediate financial needs, such as managing the recent jump in home loan repayments, or skyrocketing credit card charges, but the potential consequences of doing this can be severe.
Risking your future income stream:
One significant risk of using your superannuation to manage a home loan is the potential erosion of your retirement savings. Superannuation works best as a long-term savings vehicle, ensuring you have adequate funds to support your lifestyle in retirement.
Withdrawing your funds prematurely to address short-term financial concerns, like paying off your home loan, can compromise the compound growth and overall size of your retirement nest egg.
It's essential that you carefully assess the trade-off between immediate financial relief and the long-term impact on your retirement savings.
Impacting your potential government benefits:
In Australia, your Aged Pension is means-tested, taking into account your assets and income. By using your superannuation to pay down part of your home loan, you’ll increase your assessable assets, potentially reducing your eligibility for government pension benefits.
This risk underscores the importance of seeking professional advice before making any decisions about using your superannuation to help cover your home loan repayments.
Early Withdrawal IS subject to taxation:
The timing of when you access your superannuation matters a lot more than you think.
The preservation age, (i.e. your retirement age, which is when you’d usually access your superannuation), varies depending on your birth year.
Accessing your superannuation before you reach your preservation age can result in penalties and additional taxation - as your super is treated as taxable income while you’re still of working age. It’s important to be aware of these restrictions so you can plan accordingly.
On the positive side, using superannuation for a home loan can provide a sense of financial relief and security.
Paying off your mortgage early may reduce financial stress, increase your disposable income, and provide a sense of accomplishment.
It can also eliminate the ongoing interest costs associated with your home loan, potentially saving significant amounts over the life of the loan.
The bottom line:
While gaining early access to your superannuation to manage your home loan offers immediate financial benefits, it comes with inherent risks as well.
The potential impact on your long-term retirement savings, any government benefits, and your tax status highlight the need for thorough financial planning and professional advice.
Striking a balance between your short-term financial goals and long-term financial security iwill help you make informed decisions that align with individual circumstances and aspirations.
*Australian Superannuation accessed for your offset account ^Early release of Superannuation through a Family Lense
