Coronavirus: Why withdrawing superannuation early is a mistake

Australians have rushed to take up a key government policy designed to ease the coronavirus crisis – but experts it’s a ticking time bomb.

Almost half a million Aussies are risking their financial future as the government prepares to pay out $3.8 billion in superannuation.

Australians who have taken a hit due to the COVID-19 pandemic have been able to apply for the early release of their super from April 20.

The Federal Government recently announced retirement funds would be made available to those experiencing financial hardship because of the coronavirus crisis.

Eligible Aussies will be able to grab $10,000 from their super this financial year and a further $10,000 in 2020-21, with applications being accepted through Australian Taxation Office online services in myGov.

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Today, treasurer Josh Frydenberg announced the Australian Tax Office had already approved 456,000 applications, totalling $3.8 billion.

“Those applications are now with the superannuation funds for their payment over the next five days. The average withdrawal is around $8000,” he said.

“The ATO has also paid out $3 billion to 177,000 businesses employing 2.1 million Australians as part of our cashflow boost measures which was a measure designed to support businesses, keep people employed, meet their fixed costs, by linking those payments – up to $100,000 and a minimum $20,000 – to those pay rolls.”

Mr Frydenberg also spoke about the government’s other economic measures designed to help citizens through the crisis.

“Two weeks ago, the largest economic lifeline that this country has ever seen passed the parliament. The $130 billion JobKeeper package providing a wage subsidies of $1500 a fortnight will support the jobs of millions of Australians,” he said.

“And it was part of a broader sweep of economic measures totalling $320 billion, or 16.4 per cent of GDP, which the government and the Reserve Bank rolled out to support our economy at this very difficult time.

“Cash payments to households, cashflow boost to businesses, support for the financial system, early access to super, accelerated depreciation, instant asset write-off and a range of other economic measures.”

He said the $750 cash payments have now gone out to 6.8 million people totalling $5.1 billion.

More than 900,000 Australian businesses have registered their interest in accessing the JobKeeper payment.

However, experts previously told news.com.au Aussies should only access their super early as a last resort.

“Before you withdraw super, there are two main things you need to consider,” Australian Securities and Investments Commission senior executive leader, financial capability Laura Higgins told news.com.au.

Experts say the Government’s super plan could seriously backfire. Picture: Lukas Coch/AAP

“Firstly, have you considered other options such as government financial assistance or applying for a hardship variation on your mortgage? Secondly, are you considering the long-term impacts?

“Money withdrawn and spent now is money you won’t have invested for the future. Go to Moneysmart.gov.au and make an informed decision.”

HOW TO APPLY

Eligible citizens and permanent residents of Australia or New Zealand can apply for up to $10,000 in 2019–20 and up to a further $10,000 in 2020–21.

Applications can be submitted online through myGov until June 30, 2020 for the 2019–20 year, and between July 1 2020 and September 24, 2020, for the 2020–21 year.

You will not need to pay tax on amounts released and will not need to include these amounts in your tax return.

You do not need to attach evidence to support your application. However, you should keep records and documents to confirm your eligibility as we may ask you for this information.

WHO IS ELIGIBLE?

To be eligible for early release of super, a citizen or permanent resident of Australia and New Zealand must be either unemployed or eligible to receive the Jobseeker payment, youth allowance for jobseekers, parenting payment, special benefit or farm household allowance or

You will also be eligible if you were made redundant, had your working hours reduced by at least 20 per cent or were a sole trader whose business was suspended or had a reduction in turnover of 20 per cent or more on or after January 1, 2020.

It is not yet known whether those receiving JobKeeper payments will be eligible.

‘ABSOLUTE LAST RESORT’

Finance expert Natasha Janssens, the founder of the Women With Cents online finance platform for women, said withdrawing super early could be a huge mistake.

“Superannuation tends to grow over the long term, and by taking out more than necessary now, people might miss an opportunity for future growth, leaving them with a lower retirement balance,” she said.

“Early access to retirement savings should only occur under extenuating circumstances and needs to ensure it gets to those who need it most, in an efficient manner.”

For example, a 25-year-old who withdrew $20,000 from their super now could end up losing more than $130,000 when they retire, while the same withdrawal from a 35-years-old’s account could represent an $80,000 loss of future benefits.

“It must be an absolute last resort after you have exhausted all other government-related options,” Ms Janssens stressed.

‘FRIGHTENING’ IMPACT

Pascale Helyar-Moray, co-founder of the female-focused Super-Rewards program which earns users cash as they shop and puts that money directly into their super to boost it, said the pandemic was particularly affecting women and their superannuation.

Firstly, the industries that have been hardest hit by closures and staff stand-downs – such as retail, hospitality and events – are predominantly staffed by women, as they tend to allow greater flexibility.

Secondly, women are “already behind the eight-ball” when it comes to superannuation, with women ending their working lives with 58 per cent as much super as men on average.

She said women who withdrew $20,000 from their superannuation now could seriously decimate their nest egg.

“There’s a bit of a short-term attitude we’re seeing, with more than 600,000 already requesting early access to their super – that represents around five per cent of the Australian adult population, so that’s huge,” she said.

Job losses have led to mass queues outside Centrelink offices across the country. Picture: Glenn Hampson

“I am sure some people absolutely need this because they’re at the wall financially after having the rug pulled out form under them, but I also think there could be an element of people panicking and thinking, ‘If I can get my hands on the money I’ll just take it and have it there in case,’ and to me it feels like the financial equivalent of stocking up on toilet paper.

“By doing that, how are women in particular going to build it back up again?”

Ms Helyar-Moray said there was already a huge percentage of women out of the workforce or only working part-time or casually pre-COVID-19, and that it would be a “long time” before many businesses started hiring – and paying super – again.

“Do whatever you can before you touch your super – review government entitlements, apply for assistance from banks or apply for jobs first,” she said.

“And if there’s no other choice, withdraw the absolute bare minimum – just because $20,000 is there doesn’t mean you have to take it all.

“Remember it takes 50 years to build a comfortable retirement even when everything’s going well.”

She said it was “frightening” that so many people were considering withdrawing their super, and that while it might look like a relatively small sum of money now, it would add up over the course of their working lives.

HOW MUCH SUPER SHOULD I HAVE?

According to the Association of Superannuation Funds of Australia (ASFA), the country’s peak policy, research and advocacy body for Australia’s superannuation industry, at the moment, a single person aged around 65 would need just over $28,000 per year or a couple just over $40,000 to have a “modest” retirement.

That would allow a lifestyle better than what you’d have if you relied purely on the age pension – but still means you would only be able to afford fairly basic activities.

But if you want a “comfortable” lifestyle – with the occasional overseas holiday and the ability to dine at restaurants and buy nice things – you will need just above $44,000 per year, or more than $62,000 a year for couples.

Another popular measurement for how much cash you’ll need is the two-thirds rule – the idea you will require two-thirds of your final year’s salary per year to maintain your lifestyle.