Understanding the long-term consequences of early super withdrawals

The Federal Government’s Superannuation Early Release Scheme allows people financially affected by COVID-19 (coronavirus) to access up to $20,000 of their super has provided some Australians with a short-term financial lifeline.

But, as is sometimes the case, short-term gain can cause long-term pain, and withdrawing money from your retirement savings now could have a negative impact on your finances down the track. 

We look at how much has been withdrawn, what it’s been spent on and what the risks are to help you make the right choice for both your short-term and long-term financial wellbeing.

What is early release of super and who’s eligible? 

Of its economic response to COVID-19, the Federal Government introduced a scheme earlier this year allowing people to apply for the early release of some of their super.

Eligible Australians could access up to $10,000 of their super between 20 April and 30 June 2020, and an additional $10,000 of their super between 1 July and 31 December 2020.

To be eligible, the ATO states that you must be a citizen or a permanent resident of Australia or New Zealand. You must require the COVID-19 early release of super to assist in dealing with the adverse economic effects of COVID-19.

In addition to this, you must meet at least one of the following criteria:

• you're unemployed, or
• you're eligible to receive a JobSeeker payment, youth allowance for job seekers (unless you're studying full time or you’re a new apprentice), parenting payment, special benefit or farm household allowance, or
• on or after 1 January 2020:

a) your role was made redundant, or 

b) if your working hours have been reduced by 20% or more, or

c) if you’re a sole trader - your business was suspended or suffered a reduction in turnover of 20% or more.

How much money has been withdrawn to date? 

From the beginning of the scheme until 25 October, Australians had withdrawn $34.6 billion from their super savings with an average withdrawal of $7,660 per person¹.

How the money is being spent? 

Concerns have been raised about the eligibility of some people who have accessed their super early, with one analysis revealing that 38% of people who had withdrawn money from their super had not suffered a drop in their income².

Of the money withdrawn between 20 April and 30 June, 38% was spent within the first fortnight of it being received, with 64% spent on discretionary purchases such as clothing, furniture, restaurants and alcohol, 22% on essentials and 14% to repay debts³.

Understanding the long-term consequences of early super withdrawal 

Super is designed to provide you with an income to pay for your lifestyle in retirement, so withdrawing money from it now could affect the quality of the retirement you can enjoy.

While the short-term impact will be to reduce your super by the amount you withdraw, there may be a more significant impact on your retirement savings over the longer term. This is because you’ll miss out on the additional returns you could have earned through the investment of that money by your super fund – this is known as compounding. 

While compound interest is very powerful when it’s working to build your super balance, it can be equally powerful in magnifying the impact of a withdrawal now on your super balance over the longer term. And because super is a long-term investment, the amount you stand to forfeit could be larger the younger you are.

To calculate the impact a withdrawal now may have in the future, you can check out the MoneySmart superannuation calculator or read more about some of the other things to consider before accessing your super. 

How to rebuild your super if you’ve accessed it early 

If you’re interested in replacing super you’ve withdrawn, or in boosting your super balance more generally, you could consider doing so by making super contributions, such as concessional super contributions (including salary sacrificing), non-concessional super contributions, receiving spouse contributions or consolidating your super accounts to save on fees and charges, depending on your circumstances. Find out more about the things to consider when making these decisions. 

And if you’re a low-to-middle income earner you could also be eligible for the government co-contribution or the low and middle income super tax offset.

Learn more about how much super you might need in retirement, and some of the different strategies you can use to rebuild your retirement nest egg.

How to apply for early access to your super

If you’ve explored other financial assistance available and are still considering withdrawing some super you can find out more about how to apply.

If you do go ahead with a super withdrawal, it could be a good idea to calculate how much you think you’ll need based on your current expenses and only withdraw that amount. Bear in mind that you can only make one application for withdrawal before 31 December, so if your funds aren’t sufficient you won’t have an opportunity to withdraw again.

Ask an expert 

Before making any decisions, log into My AMP to check your super balance. It may also help to speak to an expert –you can contact us on 131 267 or use our find an adviser search function.

If you’d like to understand more about the impact of COVID-19 on your finances you can also visit our dedicated COVID-19 help hub. 

_{¹ APRA, COVID-19 early release scheme – Issue 27,2 November, 2020. 
^2,3 Illion, New real time data: what has happened to all that super? 14 August, 2020.}