What to consider when withdrawing your super early

As the COVID-19 virus took a sledgehammer to the economy, the federal government rapidly introduced a range of initiatives to help individuals who lost income as a result of the measures taken to control the virus.

One of those initiatives was to allow qualifying individuals access to a portion of their superannuation to help them meet their living costs. Withdrawals are tax free and don’t need to be included in tax returns. Most people can withdraw up to $10,000 in the 2019/2020 financial year and up to a further $10,000 in the 2020/2021 financial year.

For many people this early access to super will prove to be a financial lifesaver, but for others the short-term gain may lead to a significant dip in wealth at retirement. And the younger you are, the greater that impact on retirement is likely to be.

Alexander provides an example that many people will be able to relate to. He’s a 30-year-old hospitality worker, and due to the casual nature of his recent employment he is not eligible for the JobKeeper wage subsidy. He is eligible to apply for early release of his super under the COVID-19 provisions, however before going down this route he wants an idea of what the withdrawal will mean to his long-term situation.

Taking the max

Much depends, of course, on the future performance of his superannuation fund. However, if Alexander withdraws $20,000 over the two financial years, and if his super fund delivers a modest 3% per annum net return (after fees, tax and inflation), then by age pension age (67, if born from 1 January 1957), Alexander will have $39,700 less in retirement savings if he doesn’t make the withdrawal.

At a 4% net return, he will be $65,360 worse off if he makes the super withdrawal.

But that’s not the only disadvantage for Alexander. A smaller lump sum at retirement means a lower annual income. If Alexander draws down his super over a 20 year period, at a 3% net return, he will be around $2,670 worse off each year as a result of making the withdrawal. Over 20 years that adds up to a total loss of $53,375. At a 4% return, his youthful withdrawal will cost him over $96,000 by the time he reaches 87.

Reducing the risk

On the plus side, if Alexander is eligible for a part age pension when he retires, his smaller superannuation balance may see him receive a bigger age pension.

There are other things Alexander can do to reduce the financial consequences of accessing his super early. One is to only make the withdrawal if he absolutely has to. Or if he does make the withdrawal, to use the bare minimum and, when his employment situation improves, to contribute the remaining amount back to his super fund as a non-concessional contribution.

COVID-19 is adding further complexity to our financial lives, so before making decisions that may have a long-term impact, talk to your Bridges financial adviser.

Superannuation – start your strategy early!

Retirement and superannuation aren’t exactly at the forefront of a 20 or 30 year old’s mind – but we think it should be! Salary sacrificing more into your super now, could make a big difference later in life. An effective financial strategy is to vital in helping you achieve your goals and making most of the opportunities available. It’s never too early to start planning for the future.

So how do you do it?

Salary sacrificing is a strategy in which your employer takes some of your pre-tax salary and puts it into your superannuation fund – the ATO describes it as “an arrangement with your employer to forego part of your salary or wages in return for your employer providing benefits of a similar value”.

Rather than having your salary paid to you, you can have it paid into a superfund. If the sacrificed salary is made to a complying fund, it isn’t considered a fringe benefit. Another benefit, stated by the ATO is “if you make super contributions through a salary sacrifice agreement, these contributions are taxed in the super fund at a maximum rate of 15%. Generally, this tax rate is less than your marginal tax rate”.

This tactic not only increases the super you’re saving, but it also reduces the amount of tax you pay. Since the sacrificed income is not counted as assessible income (for tax purposes), it isn’t subject to Pay As You Go (PAYG) tax. Depending on your income, salary sacrificing could even drop you down a tax bracket!

The ATO has online resources for tracking your super, as well as helpful information on growing your super. They also recommend consulting the Fair Work Act 2009 if you’re considering salary sacrificing (here, you can find more information and check your entitlements).

Chatting with your loved ones and employer is also a good idea when considering salary sacrificing. However, to get the most out of your financial options and to fully understand the limitations that come with strategies like this, we recommend meeting with a trained professional.

Our friendly team are very experienced in their field and your initial consultation with them is free! Get in touch with us today.

Bridges Financial Services Pty Limited (Bridges). ABN 60 003 474 977. ASX Participant. AFSL No 240837. This is general advice only and does not take into account your objectives, financial situation and needs. Before acting on this advice, you should consult a financial planner.