What is the cost of withdrawing your super early?

Some weeks ago, I wrote about changes to superannuation laws that will allow people to access up to $20,000 from super, spread over the 2019-20 and 2020-21 financial years, to help meet the financial challenges resulting from the Coronavirus pandemic. You can access the article here .

People could lodge their application for release of up to $10,000 for the 2019-20 financial year from 20 April 2020. Any amount approved for release is tax free.

Just to recap, people eligible to access their super early can make an application through their my.gov account.

The Australian Taxation Office (ATO) must be approve the early release of superannuation benefits. Once an application has been approved, the ATO will inform the applicant’s superannuation fund which will then release the approved amount.

At the end of the first week, the ATO had received more than 500,000 applications from Australians seeking the early release of their superannuation. The average amount requested for release was just over $8,000 (out of the $10,000 maximum for 2019-20).

But what is the downside of requesting the early release of superannuation?

Possibly the greatest risk is a reduction in savings at retirement. Withdrawing money from super early means that it is no longer invested and benefiting from the power of compound interest.

The Australian Securities and Investment Commission (ASIC), through their consumer website, moneysmart.gov.au has a calculator that allows a person to estimate the likely effect on their ultimate retirement saving of withdrawing super early. The calculator estimates the loss of retirement savings at age 67, in present day dollars and uses a number of basic assumptions that can be found on the website.

Using the moneysmart calculator, the following table illustrates the potential decline in retirement savings for different amounts withdrawn, based on different current ages and a planned retirement age of 67:

While the impact on potential retirement savings is an important consideration, there is another risk that needs to be considered.

With the introduction of legislation in 2019 designed to help protect super fund members’ balances, restrictions have been placed on super funds being able to offer or maintain insurance cover in certain circumstances.

In particular, a super fund cannot continue to provide insurance cover for members in the following circumstances:

1. A member has an inactive account – an inactive account is one that has not received a contribution, or a rollover from another superannuation fund, in the previous 16 months, or
   
   
2. A member has a small account – a small account is an account with less than $6,000. If a person were to request early release of some of their superannuation savings, and their balance fell below $6,000, they will most likely lose their insurance held through their super account.

Where insurance is held through super and either of the above events occur, a person can opt in to retain their insurance cover. This involves making a written request to their superannuation fund to maintain their insurance.

Accessing super early as a result of the impact of the Coronavirus will be an attractive option for many people. Close on 1 million people have expressed an interest in accessing their super early.

However, like many things in life, there may be an indirect cost in doing so.

For anyone thinking about taking advantage of the opportunity to access their super early, it’s important to speak to a professional first. They can provide an objective view of your financial circumstances and help you plan for both your short term and long term financial goals.