Pre Covid-19 eligibility requirements
Prior to the Covid 19 pandemic there were two ways you could release up to $10,000 per year from your superannuation to help you with payments of debts and expenses:
1. Compassionate grounds, which allowed you to access your superannuation if:
- your lender had commenced legal action against you and you had the approval of your lender
- If you required medical treatment, alter a property due to medical need and medical transport for you or your dependant
- Pay for a funeral
2. Financial hardship grounds, which allowed you to access your superannuation if you had been on Newstart (now Jobseeker) allowance for over 26 continuous weeks.
Any funds that were released under these grounds were subject to tax. The actual tax rate could vary but for most people it is around 22%, meaning the individual would receive approximately $7,800 after tax was deducted.
Depending on your age and the type of superannuation fund you have, the tax may be as high as 47%. You should check with your superannuation fund and/or accountant to see what tax rate applies to you.
New Covid-19 eligibility requirements
The Government has announced additional eligibility requirements which enables an individual to apply to release $10,000 from superannuation this year and a further $10,000 after the first of July.
However, there is a grey area surrounding this, The ATO’s own website advises the following:
To apply for early release, you must satisfy one or more of the following requirements:
- You are unemployed.
- You are eligible to receive a job seeker payment, youth allowance for jobseekers, parenting payment (which includes the single and partnered payments), special benefit or farm household allowance.
- On or after 1 January 2020, either
- you were made redundant
- your working hours were reduced by 20% or more
- if you were a sole trader, your business was suspended or there was a reduction in your turnover of 20% or more.
If you have been found to illegally withdraw superannuation then the penalties are severe and more information can be found here;
You do not need to attach evidence to support your Covid-19 release application, however, you should keep records and documents to confirm your eligibility as the ATO may ask you for this information.
If documentation is requested at a later date and you are unable to provide it, you may be investigated by the ATO for illegal early release. Your situation would then be looked at on a case by case basis for penalties to be determined.
If eligible, there are some advantages of a Covid-19 release of superannuation compared to release under Compassionate Grounds or Financial Hardship, namely:
- No documentation needs to be submitted at time of application (although it should be available upon request)
- Superannuation funds are typically making the payments in a prompt manner
- You will not need to pay tax on amounts released and will not need to include it in your tax return.
Withdrawing money from superannuation is in effect sacrificing future wealth to cover current expenditure. With the compounding impact of superannuation, meaning that earnings on superannuation savings themselves will earn income, the cost of withdrawing now can cost you much more in future income.
People calculate the compounded cost using different rates of return. Through using the Moneysmart calculator, link to Moneysmart retirement planner here, we have calculated that for a 40 year old single person with current income of $85,000 and a current superannuation balance of $100,000 taking out $20,000 now would cost you $35,000 when you retire in real dollars.
The same statistics run through Australian Super calculates the $20,000 withdrawal would cost you $44,000 in real dollars. Link to ‘Super Projection Calculator’ here.
Andrew Robertson writing for the ABC puts the cost at a far greater amount. Using the example of a 30 year old, with 35 years left to work, and with super fund returns at very conservative 5 per cent a year, that $20,000 today would equate to $110,320 in 2055. Article available here.
Scott Pape, the Barefoot Investor, estimates that for a 25 year old the cost may be as much as $132,000. Article available here.
Furthermore, you may be withdrawing superannuation funds at a time when they have been devalued and as a result, you will be locking in recent losses, rather than giving the funds the opportunity to rise in value again over a period of time.
The impact on insurance
Superannuation often provides important insurance coverage, including life insurance, total and permanent disability insurance and income protection insurance. Changes brought into law on 01 April 2020 mean that when the balance on a superannuation fund drops below $6,000 all insurance payments may be automatically cancelled in order to preserve the balance of the superannuation. Once the insurance payments are cancelled the insurance itself will then automatically cancel. This could have a significant impact on people who fall sick and are unable to work meaning they no longer have any insurance to claim on.
This means that if you withdraw money from your superannuation under any of the grounds described above, to a point where the account balance falls below $6,000, any insurance attached to your superannuation might be cancelled. You should contact your superannuation fund to determine:
- What type of insurance is attached to your superannuation
- If your insurance will be cancelled if the account balance falls below $6,000
What to consider
Whilst the Government is allowing people impacted by COVID-19 to access their superannuation, you should think long and hard about this before you do so.
Superannuation is there to support you when you retire and no longer earn any income. Its compounding affect over time means that $1 now will be worth considerably more when you retire. Accessing your superannuation now, especially those under 30, may be one of the most expensive ways to access money you have and should only be used as a last resort.
Financial counsellors, who support people experiencing financial hardship, will always look at all other options for a client before they consider accessing superannuation. So before you start filling in those forms consider:
- Are you eligible for any of the Government COVID-19 response payments/supplements?
- Can you negotiate a moratorium or delay on your debt repayments. Many creditors are approving 6 month deferred payments to allow people to get back on track.
- Review your expenditure – can you reduce any of your costs?
- Do you have any savings you can use?
- Have you got access to reasonably priced credit? If your income is below $45,000 or you are on a benefit then you may be eligible to access a No Interest or Low Interest Loan – check out WA NILS for more information.
Financial counsellors provide a free service for people experiencing financial hardship and offer information, advice and advocacy to help you get back on track. If you are seeking to get your debts under control you can start by preparing a budget to review your income against your expenses. Reducing debt without curbing spending may result in further debt.
There are always alternatives when dealing with debt and a financial counsellor can help you to negotiate these.
There may be some instances where you feel you have no alternative but to access your superannuation and that is perfectly acceptable, however, always question why you are looking to access it and if possible discuss this with a Financial Counsellor first.
Kevan O’Hare Paul Jordan
Financial Counsellor Financial Counsellor
Financial counsellors are not financial advisers. You should consider seeking independent legal, financial, taxation or other advice to check how the information in this article relates to your unique circumstances.
The FCN is not liable for any loss caused, whether due to negligence or otherwise arising from the use of, or reliance on, the information provided directly or indirectly, by use of this information.