Be super savvy: avoid the early withdrawal traps

29 June 2020

Dr Natalie Peng, from the UQ Business School, shares her thoughts on allowing Australians to access their savings early and how the superannuation industry has coped amid the COVID-19 crisis.

In an attempt to ease the financial strain during the COVID-19 pandemic, the Australian Government has changed the restrictions around early access to superannuation (super). This new rule allowed individuals to withdraw up to $10,000 in a lump sum before 1 July 2020, and a further $10,000 in the new financial year.

While this might sound appealing to many who have lost income, is it a good idea?

To be eligible to withdraw super early, individuals need to be unemployed, be in receipt of a nominated Centrelink benefit, or have had their work hours reduced by 20 per cent or more. However, there are some critical factors to consider if you decide to go down this path.

Before going into the detail, let’s step back and recognise that superannuation, together with the age pension, form the two pillars of Australia’s retirement savings system. In simple terms, super means that a part of our wages is saved for our retirement years.

The public age pension (with the maximum level set at 25 per cent of average weekly earnings) is meant to be a bare minimum, or a ‘safety net’ to supplement super, and is not designed as an alternative. Hence, there is a very strong need for super.

Early access to your super scheme might seem like an attractive option to access funds, and useful for those who are experiencing genuine financial stress – but it also comes with a downside.

Accounting Lecturer Dr Natalie Peng, from the UQ Business School.

Super spent on non-essential purchases

The problem is, many Australians are withdrawing their super because they can, not because they need it. There are recent reports that super savings have been taken out in the Australian Government’s early release scheme and frittered away on non-essentials, like gambling, alcohol and furniture.

Australian Prudential Regulation Authority (APRA) figures show, over the week to 7 June, super funds made payments to 167,000 members, bringing the total number of payments to about 2 million. 

However, an alarming analysis revealed that 40 per cent of Aussies who had withdrawn super early either had no decrease in income, or their income falls were more than offset by increases in government benefits.

Widening the super gender gap

Treasury figures show that half of all claims under the scheme are being made by people aged under 35, who are unlikely to have other money outside super to fall back on.

It is extremely concerning that it is younger, lower-income-earning females who are disproportionately withdrawing their super because of their overrepresentation in crisis-affected industries such as retail, hospitality and childcare, as well as in casual employment.

As it currently stands, the gender pay gap in Australia is 13.9 per cent. The gap in superannuation is far worse. The trend for young women dipping into their super may lead to further growth of the gender super gap.

How will your super be impacted in the future if you withdraw early?

Super is a long-term investment. The money you take out today will be money you don’t have in retirement. You are also giving up the compounding returns over the next decades on the amount you withdraw.

We will get to the other side of this crisis, and you want to make sure that whatever decision you make now doesn’t cause any financial issues in the long term.

It would be a wise idea to work out what accessing super early could end up costing you in retirement by using an online super withdrawal estimator. Modelling shows that a 20-year-old woman withdrawing $20,000 from superannuation today could lose $120,000 by the time she retires. A 30-year-old-woman could lose $100,000.

For some people, accessing their superannuation has already resulted in crystallising a significant loss in the market downturn, and lost money they would probably have clawed back given the recent rebound in the All Ordinaries.

Other options to accessing your super early

Remember that this new measure allowing people to access their super is just one of several ways you can get help. There are also a range of Australian Government COVID-19 support packages available. It’s also worth checking with your bank to see if they offer home loan and credit card repayment freezes. Some landlords and utilities providers are also offering flexibility when it comes to rent and bill payments. Super should be the last resort.

More than 70 per cent of Australians who have life insurance hold it through super. Be aware that you may lose your life and income protection cover if your super balance falls to zero or is too low.

Before accessing your super, I strongly recommend you seek advice on implications for your retirement savings and default super insurance entitlements. Many super funds offer free advice on this scheme, as well as the Australian Government’s Financial Information Service Officers.

How is Australian super weathering the storm?

Australia’s super industry is coping well despite the pandemic’s impact on market volatility. The APRA highlighted that just 0.3 per cent of the value of Australian super had been lost in the 12 months, to 30 April 2020. This has been credited to 2019 being one of the best years ever. This contrasts strongly with the fallout from the global financial crisis a decade ago, when super funds saw savings drop by about 20 per cent.

But not all parts of the industry are weathering the crisis equally. The retail super fund sector loss was the worst hit because of its exposure to equity markets. While most super funds still have strong cash flows and balances, the withdrawals will be felt by some small funds and will affect their investment and asset allocation strategies.

Is early access changing your mindset to super?

A concern shared by the super industry is that this scheme creates a precedent if it's seen as a regular opportunity to dip into super every time there's a major national problem. That would ruin the entire super system that we have built in Australia.

Eventually, people will suffer if super funds have to invest in more liquid assets to be prepared to regularly pay a large number of people before they reach retirement age.

The biggest piece of advice I can offer as a superannuation researcher, is to try and avoid cracking open your super unless you need the money to survive. If you do need to access your super early, plan to pay it back as quickly as possible once you get back on our feet, as super is still the most tax-effective investment.

Hopefully, before the second round of applications for early withdrawal begins in July, there will be a policy reconsideration – so a loss of income will need to be proven, rather than just attested to, as is currently the case.

For more information, visit the UQ Business School website.

The information provided in this column is general in nature only and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information in this column, you should consider the appropriateness of the information for your own objectives, financial situation and needs.

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