The Australian government have included early access to superannuation as a stimulus measure to help households deal with the financial difficulties imposed by the COVID-19 pandemic. This measure applies to individuals that have experienced a loss of 20 per cent of working hours or business turnover, become unemployed or are on a Centrelink payment. If you meet these conditions, you can withdraw $10,000 tax-free before 30 June and another $10,000 between July and September 2020.
For many people, the $20,000 is critical to saving their homes and businesses. However, there is a cost. Consider these five points before taking action.
Lost income in retirement
It’s easier for all of us to put off thinking about the future. For young people, retirement is a long way away. A report by Industry Super Australia has found that people under 40 are twice as likely to want to access their super early. But, the younger you are, the more impact it has on your retirement saving due to missed compound interest. A 20 year-old who withdraws $20,000 could lose about $100,000 for retirement, a 40 year-old could lose more than $63,000.
You’re a women
Because superannuation is paid as a percentage of your income (9.5 per cent is the compulsory amount), your earnings affect how much superannuation is accumulated. Because women spend time out of the workforce in caring roles, work part-time, have lower paid jobs, and generally susceptible to a gender pay gap, women have lower superannuation balances then men.
The average superannuation balance for a women in her 40’s is under $62,000, while men have $112,000. By retirement, women have an average super balance of $157,000 while men had $271,000, 47 per cent less. Moreover, 3 in 5 single women over 65 rely on the full age pension as their sole source of income, and more than half of them live in permanent income poverty.
Selling out of your investment at a low point in the market
Since the 17th of February, the Australian stock market has lost around 28 per cent of its market value. If you access your superannuation now, you are selling the units you hold, which may be invested in a combination of cash and shares, depending on the investment strategy selected for your account. Thus you are selling at a bad time.
Source: asx.com.au
Other people are pressuring you
Since announcing the COVID-19 early access to superannuation measure, reports of misuse and abuse have surfaced. Landlords were in the spotlight for telling renters to access super to pay rent. Another concern is for victims of domestic violence who may be coerced by the perpetrator into applying for early access.
In addition, the Australian Tax Office warn people that promoters of early release of superannuation schemes might mislead you by telling you they can help you withdraw your super to pay off a credit card, buy a house, or go on a holiday. This is illegal. Such promoters can face prosecution and civil or criminal penalties.
Concerns about undermining the superannuation scheme
So far, $4 billion has been paid out to 456,000 people under the COVID-19 early access scheme. Estimates of the total that will be withdrawn from the previously $3 trillion superannuation industry put the total value of $30-$50 billion.
This has some consequences for all of us. First, the scheme itself creates a precedent that protecting people’s retirement income is not highly valued by society. It paves the way for governments to dismantle the scheme, or chip away at it. Second, superannuation funds will be more cautious in the future to hold higher reserves, thus generating lower returns.
The Superannuation Guarantee scheme is not perfect. Many people miss out and it preferences higher income earners. Ask our international counterparts though, any many people will say we are lucky. Until we have a fully funded pension, it’s the best we’ve got. So be sure you make an informed choice before you withdraw. MoneySmart have developed more resources to help guide you through the decision-making process.
The information in this article is for general use only. It should not be taken as constituting professional advice.
Author
Dr Tracey West has a strong background in household finance, with several publications on household finance, financial literacy and financial planning issues, including a PhD thesis completed in 2016.
Recent work has been published in Economic Notes, Financial Counselling and Planning, Financial Planning Research Journal, Journal of Family and Economic Issues, JASSA, the Consumer Interests Annual. Dr West’s work contributes to knowledge on investor behaviour, informing curriculum development and guidance for advisors in the financial services industry.
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