As part of its COVID-19 coronavirus economic response, the Federal Government is allowing eligible Australians to access some of their superannuation early.
If you’re eligible, you can access up to $10,000 of your super between 20 April 2020 and by 30 June 2020 and up to a further $10,000 from 1 July 2020 until 24 September 2020.
However, accessing your super early is not without its risks. Super is designed to pay for your life in retirement, so withdrawing money from it now could affect your retirement lifestyle. Below we look at five things to consider to help you make an informed decision.
1. Other government or financial assistance
Many people are suffering financially due to the business shutdowns that have resulted from COVID-19, and you may be having trouble paying your bills, repaying debts or finding money for other essentials, such as food and your rent or home loan. Accessing some of your super early could help to alleviate some of these financial pressures, but there may be other options.
For example, you may be eligible for one of the government’s other COVID-19 financial assistance measures, such as the JobKeeper Payment or Coronavirus Supplement.
Many banks are offering home loan and credit card repayment freezes, but you should check with your lender whether the freeze also applies to the interest on these debts or whether you’ll still be incurring interest during this time. Some landlords and utilities providers are also offering flexibility when it comes to rent and bill payments - it’s worth getting in contact to discuss your situation. Alternatively, your home loan or personal loan may have a redraw facility, you may qualify for a bank overdraft or you may have assets you can sell to boost your cash flow if it’s absolutely necessary.
2. The potential impact on your retirement
Depending on what your current super balance is and how close you are to retirement, withdrawing money from your super early could have a big impact on the quality of your retirement.
According to the Association of Superannuation Funds of Australia (ASFA), to retire comfortably a single person will need retirement savings of $545,000 while a couple will need $640,0001. If retirement is a long way off, it can be difficult to know how your super’s tracking or whether you’re on target to achieve a comfortable retirement. To help you get a general idea about this, check out how your super balance compares to others your age or use our retirement simulator.
It’s also worth considering that while the short-term impact of accessing some super now 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 a withdrawal now could have on your super balance over the long term.
You can also calculate the potential impact on your retirement savings: visit https://moneysmart.gov.au/covid-19/accessing-your-super.
3. Your future plans
Another consideration is whether you have any future plans that may result in temporarily leaving the work force or reducing the amount of income you generate, all of which may affect your ability to save and contribute towards retirement. For example, if you’re planning to return to full-time study, take a gap year overseas, take time off to have a baby or move to working part-time, it’s worth remembering that all these things would likely lead to a reduction in the amount of super you accumulate during that time. And this could have a further impact on the quality of your retirement.
4. The current state of investment markets
Another potential downside associated with accessing some of your super now is that over the past few months investment markets have fallen due to uncertainty around the economic impact of COVID-19.
To withdraw money from your super, your super fund may need to sell some of the assets it owns on your behalf (such as shares and other types of investments). Selling these assets now may lock in any losses and the money you withdraw won’t have the opportunity to grow in value when investment markets recover.
5. The potential loss of insurance cover
Another possible consequence of accessing your super early is how the insurance inside your super will be affected. There are a couple of different ways this could happen.
Firstly, if you withdraw a lump sum from your super and it leads to a zero account balance, your super account may be closed, which means your insurance will be cancelled from the closure date.
Secondly, super laws were brought in in 2019, to help protect super balances from being unnecessarily reduced by insurance premiums. One of these laws, called the Protecting Your Super package, requires super providers to cancel any insurance inside super accounts that don’t receive a contribution or rollover for 16 months. This means, if you’re not in a position to make any contributions into your super account for 16 months, your insurance may be cancelled unless you tell your super provider you want to keep it.
If your insurance is cancelled because your account has been inactive for 16 months, and your account balance is below $6,000, we’re also required to transfer your balance to the Australian Tax Office. Where possible, the ATO will then try to connect this super money with your active super account. Exceptions apply.
What you can do about your insurance
If you’re thinking about accessing your super early, make sure you’re clear about how much insurance you currently have through your super, and whether you want it.
A good way to work out whether your insurance premiums aren’t unnecessarily reducing your balance is to use our general rule of thumb: your annual insurance premium should be below 1% of your salary. (Note: This may not apply to people who require a higher amount of insurance cover to meet their needs).
To stop your insurance from being cancelled because the account becomes inactive for 16 months, make sure a contribution or rollover is made into the account before the 16 month mark is up, or fill in this keep my insurance form.
If your insurance does get cancelled, you’re still eligible to lodge a claim for a loss event if it occurred any time before the account was closed. There may also be a window of opportunity to get it back, although it can sometimes be hard to get back at the same price or benefit level. Check your PDS for all the details specific to your super and insurance.
If you’re concerned about your insurance and what’s right for you, you should speak to a financial adviser.
Pay it forward
If you do decide to access some super early, it’s a good idea to first check your super balance – if you’re an AMP client, log into My AMP. It might be worth working out exactly how much you’ll need and only withdrawing that amount, rather than the maximum $10,000 per withdrawal available – after all, the more money you can leave in your account to grow for the future the better your retirement might be.
Alternatively, if you’re not sure what the future may hold and decide to withdraw the full amount available, you could always consider putting any unused money back into your super later on.
Ask an expert
For more information on how to apply, visit https://www.amp.com.au/insights/COVID-19/early-access-to-your-super
If you want to understand more about the impact of COVID-19 on your finances and the investment markets visit our dedicated COVID-19 help hub. You could also register for one of the webinars AMP is running to keep you up to date.
1 ASFA, Retirement Standard, December 2019.
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