The consequences of accessing your super early

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There’s an old saying in the financial world – if it sounds too good to be true, it probably is. I can’t think of a better way to describe the Government’s COVID-19 early superannuation release scheme. The chance to withdraw thousands of dollars from super proved so tempting that literally millions of Aussies have already applied for the program, in total withdrawing (so far) more than $33 billion in funds.

But while this money was intended to help people who had lost their source of income and were struggling to keep a roof over their heads, I have heard a number of examples of people who were just excited by the idea of ‘free money’.

One client relayed to me a discussion she had with friends from her local dog park, where she was asked if she’d taken any money from her super. She said no and was told she was crazy for not “getting in on the action”. One man told her he was using the $10,000 to pay down his mortgage faster. He had not experienced a drop in hours at work. Another friend was using their money to buy some new furniture and do “a few things around the house”.

These might sound like sensible financial decisions, but the thing is, there is no such thing as free money. There are trade-offs that come with withdrawing your super early and it’s disappointing to hear that many people just didn’t even consider them.

Reduced retirement savings

Industry Super Australia conducted an analysis that found a 25-year-old who took out $10,000 would have nearly $50,000 less when it came time to retire. ASFA conducted similar research in August and found that the cost at retirement for a typical 25-year-old woman who accessed $20,000 in early release super could be as much as $85,000 if she was unable to secure employment and contribute superannuation for two years.1

There’s also the issue of how much you actually had in your super balance to begin with. According to an analysis by AMP of its own clients, 14% of women and 12% of men cleared out their entire super balance as a result of the scheme.2 ASFA estimates the average superannuation balance required to achieve a comfortable retirement is $640,000 for couples and $545,000 for singles. If you are starting from zero, the older you are the more you will need to contribute to your super each year in order to meet these benchmarks.

Loss of insurance cover

I recently met with a client who took up the early access to super and now doesn’t have enough money left in super to pay the insurance premiums. Insurance in super doesn’t come for free – you are charged annual premiums that are taken from your account balance. If you have no money in your account, these premiums cannot be paid and the insurance will lapse.

And if you’re thinking to yourself, “Well, I’ll just take out a new policy,” remember that you will have to go through underwriting to apply. The older you are, the more likely it is that you have experienced an illness or injury that could cause your premiums to be calculated at a much higher rate, or your application could be rejected outright.

Fines and legal action

Finally, and perhaps frighteningly, if you do not meet the requirements for early release, you could be fined. This includes people who had their claim approved (which is about 98% of applications according to APRA).

According to the ATO, people who have applied for early release without meeting the necessary requirements could face fines of up to $12,600 for each application. The maximum penalty for making two ineligible withdrawals is $25,200.3

So, like I said, the early super access scheme is definitely in the realm of ‘too good to be true’. But there are things you can do if you’ve already withdrawn your super and are worried about the impact this will have on your insurance or your future savings. The most important first step is to seek advice from a professional financial adviser. We can look at your current situation and help you build a path back to financial stability.

If you would like a complimentary review of your insurances, give me a call today.

 

  1. https://www.canstar.com.au/superannuation/how-much-super-for-retirement/
  2. https://corporate.amp.com.au/newsroom/2020/MAY/early-super-release-gender-data
  3. https://www.ato.gov.au/Individuals/Super/In-detail/Withdrawing-and-using-your-super/COVID-19-early-release-of-super—integrity-and-compliance/
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About the Author:

Tatiana has over 15 years experience within Financial Services with the last 7 years focussed on Life Risk. Tatiana has held Senior roles with a number of organisations such as Macquarie, AMP and OnePath prior to starting Monarch Advisory Group. Tatiana holds an Advanced Diploma of Financial Services and is completing the CFP (Certified Financial Planner) through the FPA (Financial Planning Association). Tatiana is also a member of the FPA, which is the highest professional body for the Financial Planning industry. Tatiana is very approachable and passionate about ensuring her friends, family and clients are properly protected in the unfortunate event that something goes wrong.

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