Five ways to tap super without Joe Hockey’s reforms

JOE Hockey got into trouble this week for merely mentioning the idea that super could be used for something else before you retire.

Joe Hockey’s early super access idea is not without precedent. Picture: Peter Wallis.

JOE Hockey got into all sorts of trouble this week for merely mentioning the idea that superannuation could be used for something else before you retire.

Another treasurer at another time might have been given a hearing on this issue but Hockey was hit hard from the front — and from behind — as an accidental coalition of the Liberal Party, the Labor Party and even Financial System Inquiry chairman David Murray rounded on him for destabilising thoughts surrounding saving for retirement.

Using your super for “something else” is hardly heresy. The problem with Hockey’s thought bubble is that it was considered in the context of alleviating the housing affordability crisis rather than improving the super system.

After this latest mauling of the Treasurer, it is extremely unlikely we will see the rules of super loosened up. Nevertheless, many investors do not realise there are quite a number of ways to tap your super long before you retire.

Most of these are limited to DIY funds which is why more than 1 million people have become members of so called self-managed super funds over the last decade. If you don’t know about them they are each worth considering in detail:

1.Buy an investment property and move into it later.

This is an entirely feasible move within DIY super — the property can be bought with cash or it can be bought using borrowing through the super fund. As the equity builds in the house the investor may enjoy the rental income and inevitable capital appreciation. On retirement the investor can change the status of the property and move into it. This is a relatively uncomplicated way to eye, buy and save a property long before retirement using retirement money.

2. Enjoy the facility of a loan.

Under super rules you can borrow up to 5 per cent of the value of your super for other activities. If you had, say, $500,000 in super, you could borrow up to $25,000 from your DIY fund to perhaps develop other business or investment activities. In this fashion you are “using your super” long before you retire. The way this works the 5 per cent is calculated on the “market value” of your super fund so make sure it is going up! Otherwise you may have to revise how much you can borrow, safer perhaps to take a ­little less than 5 per cent.

3. Do a joint venture with your super fund.

I’ve mentioned this before and the idea received a lot of interest. Here are the basics. You have a DIY fund and you form a joint venture between the DIY fund and you — the individual investor. The vehicle for the joint venture can be a unit trust. The unit trust is split between your fund and you, let’s say in a ratio where for every one unit held by the fund you hold four. In other words you will hold 80 per cent and your DIY fund will hold 20 per cent. Now if you wish to buy a property you can use the DIY funds for deposit or equity — as long as you don’t “gear” it in any way. So let’s say you buy a $500,000 apartment, the DIY fund could put down $100,000 which will comfortably cover the deposit and give some equity in the property. You — the individual — go and borrow the rest — $400,000. Once the investment is up and running the unit trust disburses the income and the profits to you and your DIY fund on a proportionate basis — the expenses are split on a proportionate basis as well.

4. Try a multi-generational strategy.

They call this form of superannuation exploitation multi-generational strategy, it might also be called doing a deal with mum or dad. Assuming your parents have a DIY super fund you — the child (typically here people are adult salary earners) — make a tax advantaged contribution to the family super fund using salary sacrifice. With your parents in the preservation stage (no longer accumulating) they can do what they like with their money. They may for example decide to give you a gift which rewards you for your saving in the fund.

5. Severe financial hardship.

This is the least attractive option, but it is a pathway open to almost everyone and for once it is not restricted to those with DIY funds. In certain cases the ATO will allow you to access super ­before retirement such as paying for a funeral, paying for urgent medical expenses or surviving ­financially in the event of a mortgage foreclosure. The ATO are rigorous in their application of the rules here and there are heartbreaking stories of people who need money, who have money in super, but who do not satisfy the terms for accessing the money.

It is important to distinguish these legitimate avenues for the investor from dreadful “early access to super schemes” promoted by frauds and charlatans which the ATO regularly warns about.

One thing all these legitimate procedures have in common is that while they allow you to exploit the super you have built up long before you retire, they don’t actually threaten the fabric of the system itself which is to make people lock away money until they retire so they can live comfortably when they stop working.

There will be more ideas than this and obviously professional ­financial advice is required when mounting any of the elaborate procedures suggested here.