Withdrawing Your Superannuation Early: Is it Recommended?

Superannuation is a crucial part of Australia’s retirement savings system, designed to provide financial security for individuals during their retirement years.

Withdrawing your superannuation early is allowed in certain situations, especially to get temporary financial relief if you meet eligibility requirements.

However, it can significantly impact retirement savings, insurance coverage, and legal and regulatory risks. Thus, it’s essential to consider all options and seek professional advice before withdrawing superannuation early.

Understanding Superannuation

Mandatory superannuation as a retirement savings vehicle was introduced by the Hawke Government in 1991 and then implemented by the Keating Government on 1st July 1992. Its primary purpose is to provide income during retirement, working alongside government support to ensure financial security in old age.

Maintaining a superannuation fund is important for long-term financial security as it, together with voluntary savings and the age pension, will fund higher living standards during retirement.

Can I Withdraw my Super Early?

In general, you can access your super when you have reached your preservation age, which is usually between 55 and 60, depending on your birth year.

You can access your super early in very limited circumstances. However, early access to super has potential negative impacts on retirement income, tax obligations, insurance coverage, and government benefits.

Circumstances for Early Superannuation Withdrawal

There are several reasons or special circumstances that may lead a person to withdraw their superannuation early, such as experiencing severe financial hardship, terminal illness, or being a temporary resident.

Financial Hardship

Severe financial hardship occurs when an individual is unable to meet reasonable and immediate family living expenses, such as groceries, rent, or medical costs. You will typically be required to meet certain requirements (for example, receiving eligible government income support payments for a pre-determined period) and provide evidence of your financial hardship.

Terminal Illness

In cases where an individual is diagnosed with a terminal medical condition, they may be eligible to withdraw their super early to cover medical treatment and other related costs.

Permanent Incapacity

If an individual is permanently incapacitated and unable to work, they may be eligible to withdraw their super early to cover living expenses and other related costs.

Compassionate Grounds

Individuals can withdraw their super early on compassionate grounds, such as funding medical treatment, palliative care, or funeral expenses, or alternatively preventing foreclosure of your home, however, you may face fees for this, under limited circumstances. The ATO will require you to meet all eligibility conditions and provide the relevant documents to support your application.

Temporary Residents

Temporary residents (excluding New Zealand citizens) on expired or cancelled visas who have left Australia can apply online for early superannuation release through the Departing Australia Superannuation Payment (DASP) after leaving.

Risks and Considerations When Withdrawing Your Superannuation Early

Early withdrawal of superannuation may pose significant risks, so it’s crucial to weigh options, seek professional advice, and be aware of legal and regulatory requirements.

1. Impact on Retirement Savings

Early withdrawal of your superannuation fund may hinder its ability to invest in long-term investments, potentially affecting your retirement savings growth and standard of living. Additionally, early withdrawal may affect your insurance coverage, as some funds require a minimum balance.

2. Tax Implications

The super you withdraw early is generally taxed as a normal super lump sum. It counts towards assessable income for income tax, and any taxable component must be included in the tax return.

How Much Tax Do You Pay on Early Superannuation Withdrawal? 

According to the Australian Taxation Office (ATO), early super withdrawal tax implications depend on age, fund type, and lump sum components.

Aged 60 or over:

If withdrawing from a taxed super fund component, the withdrawal is tax-free. However, if withdrawing from an untaxed super fund component, you may pay tax.

For a lump sum withdrawal, there is no tax if you withdraw up to the ‘low rate cap’, which is currently at $235,000. But exceeding the low rate cap results in paying 17% tax (including Medicare) or your marginal tax rate, whichever is lower.

Aged under 60:

The tax rate for the amount released under compassionate grounds is between 17% and 22%. The lump sum paid is usually made up of taxable and non-taxable components.

Any early super payment received generally counts towards taxable income for the year, which can affect eligibility for government welfare payments.

Super Income Stream:

If you receive a super income stream and are aged 60 or over, the income is usually tax-free. If you are under 60, you may pay tax on the super income stream.

3. Alternatives to Early Withdrawal

Before thinking about withdrawing early superannuation, consider alternative financial solutions like:

• budgeting
• debt consolidation
• selling assets
• seeking financial support from the community or friends
• negotiating with creditors, and
• considering temporary or part-time jobs to improve your financial situation.

These strategies may help lower monthly repayments, provide income for urgent needs, temporarily free up cash flow, and satisfy current financial demands.

4. Government Assistance Programs

There are government income support payments and assistance programs that aim to help individuals in financial hardship avoid early withdrawal of their superannuation. Some of these programs include:

• Centrelink provides financial assistance to eligible individuals and families through various programs, such as JobSeeker Payment, Youth Allowance, and Austudy.
• Rent Assistance provides financial assistance to eligible individuals and families to help cover their rent costs.
• The Energy Assistance Payment is a one-off payment to eligible individuals and families to help cover their energy bills.
• The health care card and pensioner concession cards provide access to a range of goods and services, including prescription medicines, medical services, and public transport.
• The Pharmaceutical Benefits Scheme (PBS) provides subsidised prescription medicines to eligible individuals.
• The emergency relief program provides short-term financial assistance to eligible individuals and families in crisis, such as those experiencing homelessness or domestic violence.
• The No Interest Loans Scheme (NILS) provides interest-free loans to eligible individuals and families to help cover essential expenses, such as medical bills or car repairs.

5. Seeking Professional Financial Advice

A financial adviser can help individuals understand potential tax implications, explore alternative financial solutions, and provide guidance on eligibility criteria and application processes. This will help individuals make informed decisions based on their specific financial circumstances.

6. Case Studies and Real-life Experiences

Several studies were made on the impact of the COVID-19 Superannuation Early Release Scheme. They revealed that the scheme benefited many Australians, but its long-term impact on retirement savings could significantly impact a comfortable retirement.

As part of the 2020 Retirement Income Review, the Australian Treasury found that withdrawing $10,000 from a super account in two years from age 30 would lower superannuation by $40,300 and $24,600 for a 55-year-old.

7. Public Opinion and Expert Views

Public opinion on early super fund withdrawals is mixed, with some supporting it for immediate financial needs and others concerned about its long-term consequences.

Financial advisers point out that early superannuation withdrawal may reduce retirement savings, lead to excessive expenditure, and eliminate tax-free status.

8. Legal and Regulatory Considerations

Australia has strict eligibility requirements for early superannuation withdrawal, including financial hardship, compassionate grounds, terminal medical conditions, or permanent incapacity.

Note that offers of accessing your super early by transferring it into a self-managed super fund (SMSF) are illegal and carry heavy penalties. A false early super release claimant may be fined $12,600 per tranche.

Summary: Withdrawing Your Superannuation Early

Superannuation offers retirement security, but severe financial hardship, compassionate grounds, permanent incapacity, or terminal illness might encourage the need for an early withdrawal.

However, it may reduce retirement savings, risk losing tax-free status, and encourage wasteful expenditure.

It’s crucial to weigh options, seek professional advice, and be aware of legal and regulatory requirements.

Get Superwise About Your Superannuation with Newcastle Financial Planning Group

Superannuation is vital to your financial future in retirement as an Australian. Whatever stage you are at right now in your career, learning about how you can make the most of your long-term retirement savings plan is always good practice.

At Newcastle Financial Planning Group, we can provide the specialist superannuation advice, expert knowledge and guidance you need to help you make the right financial decisions for your superannuation strategy so you can confidently look forward to your future.

Call us or book online to secure your first appointment with us today and get started!

 

References:

• https://www.servicesaustralia.gov.au/who-can-access-their-superannuation-early?context=21971
• https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/super/withdrawing-and-using-your-super/early-access-to-super
• https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/super/temporary-residents-and-superannuation/departing-australia-superannuation-payment-dasp
• https://solutions.revivefinancial.com.au/articles/financial-hardship-super
• https://aifs.gov.au/research/research-reports/towards-covid-normal-early-release-superannuation-through-family-lens
• https://www.sydney.edu.au/news-opinion/news/2020/09/24/what-is-driving-people-s-decision-to-withdraw-their-superannuati.html