MONEY TALK: Mulling early super release?

With the start of the new financial year approaching, many Australians will undoubtedly be asking themselves a common question: “Should I access some of my super?” 

Under the government’s COVID-19 Early Release Scheme, certain members can access a further up to $10,000 of super savings from 1 July 2020, with applications available until 24 September 2020 via the myGov website. This is available whether you did or didn’t access up to $10,000 under the same measure before 30 June 2020, which has already seen $15.9 billion of payments as at June 14, according to APRA.

This scheme has already helped over 2 million Australians get through this crisis, and we must remember it is, after all, individuals’ own money, but being able to access your super early doesn’t necessarily mean you should.

As the economy slowly starts to turn around and the country (if not the world) opens up, there are a number of things worth considering.

Firstly, the fine print

To qualify, you still need to have been financially impacted by COVID-19, be an Australian or New Zealand resident, and meet one of the access conditions which generally are that you are:

• Unemployed;
• In receipt of certain government income support payments, such as JobSeeker; or:
• Since 1 January 2020, you have either: Been made redundant or had your working hours reduced by at least 20 per cent, or, if a sole trader, your business has been suspended or turnover reduced by at least 20 per cent.

And it’s worth being aware that scrutiny of the eligibility criteria is rising, with potential tax implications or fines for those who don’t. Find out more at the ATO website.

But how much do you really need?

Whilst the maximum of $10,000 may be tempting, really think about how much you actually need. Remember, every dollar withdrawn reduces future retirement savings. 

What are the consequences of withdrawing the money?

Your super has likely been invested into share markets – either directly or via managed funds, with those investments generally made with a view for returns over the long term. If you withdraw money now, this may require the sale of some of your investments with capital gains tax considerations in your fund. Also, you might miss out on the potential of some future gains as markets recover. Whilst there is no clear timing on when markets will fully recover, history shows that over time they will.

Check your insurances in super

Do you hold insurance through your super fund? If so, before you seek to withdraw funds, it’s worth considering if you will leave enough behind to continue to fund the premiums for your insurance. Whilst some funds have actively kept insurance in place for a period of time when accounts are virtually depleted, this is not endless, nor consistent across all super funds. If you don’t have enough to cover regular premium payments, you may run the risk of your insurance being cancelled.

What impact will it have on your retirement plans?

When it comes to your long term retirement plans, $10,000 (or $20,000 if this is your second withdrawal) may not feel like it will make a significant dent right now, but you have to remember that the money you have withdrawn is no longer invested in the tax effective environment that super offers, and will no longer benefit from compounding returns over the long terms. So, the amount withdrawn will likely be considerably more at retirement. Of course, you have to balance this off against what benefits you get from accessing the money now, but it is important to ensure you consider both sides of the equation.

How can you restore your retirement savings?

Look ahead, if you have withdrawn some of your retirement savings under this COVID-19 measure, or even if you haven’t but are trying to work out what you can do to recover some of the value lost through market movements, it’s important to consider your options – but equally important not to overreact.

There are a range of actions you could consider taking, and it is always worthwhile seeking personal advice from a qualified financial adviser. But short of winning the lottery, there is no quick fix. Rather, the focus needs to be (as it always should) on how you make your savings work smarter for you.  

Here are some things to consider:

Did you withdraw more than you needed?

If so, and you have some of the amount withdrawn left over, you could contribute it back to the super environment in order to benefit from the tax advantages, such as super fund earnings being taxed at 15 per cent, which is well below personal income tax rates for many people. Also, for low and middle income earners, the contribution might not be taxed on the way back in.  

Can you access some additional tax benefits?

If you make an after tax contribution back to your super (which is referred to as a non-concessional contribution) and your adjusted taxable income is below $38,564 this financial year (rising to $39,837 from 1 July 2020), then for every dollar of non-concessional contribution you make, the government will match it at the rate of 50 per cent to a maximum of $500. So, contribute $1000 and the Government gives your super an additional $500. That’s an immediate 50 per cent return and can get you back on track.

FYI, the maximum matching from the government gradually reduces if your adjusted taxable income is above this amount, but you could still be eligible for some co-contribution on an income up to $53,864 (rising to $54,837 from 1 July 2020).

Can you salary sacrifice some additional monies to super?

If you are still employed and receiving an income or have gone back to work, can you afford to sacrifice some additional monies into super? Every little bit helps, particularly if done over a sustained period of time on a regular basis, and salary sacrificing to super means the amount sacrificed is only taxed at 15 per cent in your super fund, rather than taxed at your marginal tax rate which could be higher.

It may take time to get say $10,000 back through this approach, but perhaps you still have time to make it happen. The following graph shows how long it can take to recover the $10,000 based on differing levels of income and rates of salary sacrifice.
 

In addition, if your adjusted taxable income is below $37,000 and at least 10 per cent of your income is from employment activities, you may also qualify for the low income super tax offset to a maximum of $500, which could offset some or all of the tax payable on the sacrificed contributions to super.

Think small for a bigger difference

Sometimes it can be the little things that make a difference. Salary sacrificing can obviously be harder if you are on a lower income, but think about where you spend your money today.  

As an example, a person sacrificing 2 per cent of their $35,000 salary is giving up $700 of pre-tax money. If this same person purchased a coffee each day on their way to work, if the coffees were priced at $3.50 each, that’s 200 coffees for the year (or close to one per working day) – and remember we are still talking about pre-tax dollars, so it’s really less than that.

A daily coffee is just an example – sometimes we really need it, but consider other ways you can adjust your spending habits to help you start saving.

Also, if your savings have taken a hit, can you get better returns over the long term elsewhere? This is a tricky one given higher return equals higher risk – so don’t rush and/or get some advice.

The superannuation release scheme opened up by the government has been welcomed by many Australians to provide some additional cash flow at a time when it has been really needed. It’s also provided a timely injection of liquidity into the economy. 

But remember, every decision now can have an outsized impact down the track – so any steps to reduce the impact of withdrawals on future retirement savings are well worth taking.   
 

<sub>This article was prepared by Bryan Ashenden, Head of Financial Literacy and Advocacy at BT, a part of Westpac Banking Corporation ABN 33 007 457 141, AFSL and Australian Credit Licence 233714. Information is current as at 19 June, 2020. This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regard to these factors before acting on it. This document provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. This document may contain material provided by third parties derived from sources believed to be accurate at its issue date. While such material is published with necessary permission, the Westpac Group accepts no responsibility for the accuracy or completeness of, nor does it endorse any such third party material. To the maximum extent permitted by law, we intend by this notice to exclude liability for this third party material.

Superannuation is a means of saving for retirement, which is, in part, compulsory. The government has placed restrictions on when you can access your investment held in superannuation. The Government has set caps on the amount of money that you can add to superannuation each year on both a concessional and non-concessional tax basis.  There will be tax consequences if you breach these caps.  For more detail, speak with a financial adviser or visit the ATO website.  BT cannot give tax advice. Any tax considerations outlined in this article are general statements, based on an interpretation of the current tax law, and do not constitute tax advice. The tax implications of superannuation can impact individual situations differently and you should seek specific tax advice from a registered tax agent or registered tax (financial) adviser.</sub>