Paul's Insights: Dipping into super should be a last resort
In response to the Coronavirus outbreak, the federal government has relaxed the rules around early access to super.
It’s now possible to withdraw up to $20,000 from super if you’re unemployed, eligible for JobKeeper payments, or if you’ve been made redundant or had your working hours cut by 20%.
If you’re self-employed, and your turnover (that’s money coming in the door) has dropped 20% since the start of 2020, you too have the option to withdraw money from super.
What’s on offer is one withdrawal for up to $10,000 before 1 July 2020, with a further $10,000 available between 1 July and 24 September 2020.
The Tax Office says you don’t need to provide evidence of financial stress to pull cash out of super (though keeping records always makes sense). And in a departure from normal conditions, the money is tax-free and won’t count towards Centrelink benefits.
The downside of taking money out of super today is that can make a tremendous difference to the value of your final retirement savings.
Industry Super Australia (ISA) estimates that a 50-year-old withdrawing $20,000 from their account could be worse off by $41,165 on retiring at age 67. A 25-year-old could lose up to $120,511 from their final super balance.
These outcomes reflect the power of compounding returns. A 20-something can expect to have their super invested for close to 40 years. That’s a long time for compounding to work its magic, and it explains why you could be left out of pocket in retirement by considerably more than $20,000.
The ISA numbers assume returns on super of 7% annually. However, data from SuperRatings shows the top 10 performing funds earned average annual returns as high as 8.45% over the last five years. So the impact on your super could be far higher.
The bottom line is to make an early withdrawal from super your last resort.
In addition, the sharemarket falls we saw in March can make it tempting to switch your super’s investment strategy from ‘balanced’, which is how most Australians have their super invested, to a ‘conservative’ option.
History shows this too can come with a cost.
According to ISA, during the Global Financial Crisis, fund members who moved their super from balanced options into cash-based strategies were $13,800 worse off after one year, $34,800 worse off after five years, and after seven years would have lost a whopping $46,000 of potential retirement savings.
Your super is designed to be a very long term asset. If you can afford to, keep it that way. If you don’t have to dip into your fund for emergency money, the best course of action can be to do nothing at all.
Paul Clitheroe is Chairman of InvestSMART, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.