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.

Your health and wealth during the COVID-19 pandemic

There isn’t a single person in the world who hasn’t been impacted by COVID-19. As new case numbers start to slow in Australia, so too is our economy. This time presents new challenges as everyone gets used to a “new normal” and figures out the best way to weather the coming months. This article provides an overview of different measures the Federal Government has announced to support individuals and businesses, current market performance and what you should be thinking about when it comes to your finances and continuing to build long-term wealth.

 

Government support for individuals and businesses

The Federal Government has announced two economic stimulus packages and the JobKeeper Payment to support individuals and businesses. An overview of the Federal Government’s measures announced to date is detailed below.

 

Support for individuals

The Federal Government has announced a range of measures to help individuals. Eligibility to access these measures is determined on criteria such as your employment status or loss of income due to COVID-19. Some of the key measures include:

  • two $750 payments to social security, veteran and other income support recipients (first payment from 31 March 2020 and the second payment from 13 July 2020);
  • access to the JobKeeper Payment from your employer (if eligible) equal to $1,500 per fortnight;
  • a time-limited supplementary payment for new and existing concession recipients of the JobSeeker Payment, Youth Allowance, , Parenting Payment, Farm Household Allowance and Special Benefit equal to $550 per fortnight;
  • early release of superannuation funds (see overview below); and
  • a temporarily reducing superannuation minimum drawdown rates (see overview below).

Full details about the Federal Government’s measures to support individuals are available on the Treasury website.

 

Early release of superannuation

Eligible people will be able to access up to $10,000 of their superannuation in the 2019-20 financial year and a further $10,000 in the 2020-21 financial year. To access your super early, you need to meet one of the following five criteria:

  • You are unemployed.
  • You are eligible for the JobSeeker payment, Youth Allowance for jobseekers, Parenting Payment, Special Benefit or the Farm Household Allowance.
  • You were made redundant on or after 1 January 2020.
  • Your working hours reduced by at least 20 per cent after 1 January 2020.
  • You are a sole trader, and your business activity was suspended, or your turnover has reduced by at least 20 per cent after 1 January 2020.

If you are considering early release of your superannuation, you need to consider what the potential long-term impacts may be to the growth of your superannuation fund and retirement income. While $20,000 split across two $10,000 withdrawals may not seem like a lot of money now, it could have significant compounding value if it’s left in your fund. Understandably, people may not have any other choice to support themselves financially. Make sure you speak to a financial professional to understand your risks and if this is a suitable option for you. If you’re eligible, you can apply for early release of your superannuation directly with the ATO through the myGov website.

 

Temporarily reducing superannuation minimum drawdown rates

The temporary reduction in the minimum drawdown requirements for account-based pensions has been designed to reduce the need for retirees who have account-based pensions to sell their assets to fund their minimum drawdown requirements. The new minimum drawdown rates are outlined in the table below.

 

Age Standard minimum drawdown rates (%)

 

Reduced rates by 50 per cent for the 2019-20- and 2020-21-income years (%)
Under 65 4 2
65 – 74 5 2.5
75 – 79 6 3
80 – 84 7 3.5
85 – 89 9 4.5
90 – 94 11 5.5
95 or more 14 7

 

Support for businesses

The Federal Government has announced a range of measures to help businesses facing financial difficulty. Eligibility to access these measures depends on factors such as your turnover and how much your business’s revenue has decreased due to the COVID-19 pandemic. Some of these measures include:

  • increasing the instant asset write-off threshold for depreciating assets from $30,000 to $150,000;
  • allowing businesses with turnover below $500 million to deduct 50 per cent of eligible assets until 30 June 2021;
  • PAYG withholding support, providing up to $100,000 in cash payments which allows businesses to receive payments equal to 100 per cent of salary and wages withheld from 1 January 2020 to 30 June 2020; and
  • temporary measures to reduce the potential actions that could cause business insolvency.

Full details about the Federal Government’s measures to support businesses and eligibility criteria are available on the Treasury website.

 

How the banks are approaching home loans

Banks have announced that homeowners experiencing financial difficulty can pause their mortgage repayments between three and six months. It’s important to remember that, in most cases, interest will still be capitalised and added to your outstanding loan balance. When payments restart, your lender may require increased repayments, or the term of your loan may be increased. These are important factors you need to discuss with your lender. Here’s what the big four banks are offering customers:

  • ANZ: deferral of repayments for up to six months, with a review after three months.
  • CBA: deferral of repayments for up to six months.
  • NAB: deferral of repayments for up to six months, with a review after three months.
  • Westpac: deferral of repayments for three months, with the potential for a further three months after review.

 

What do past market crashes and corrections tell us about the current environment?

While the circumstances of the current crash are unique, it’s normal to have a market crash greater than 20% every decade. Based on the last eight market crashes, the average market decline is 40% from high to low. From the initial decline to recovery, the average crash duration is 41 months, and the market bottom usually occurs around seven months after the initial 20% decline. This means it can take roughly seven months for the market to hit bottom and the following 34 months to recover.

On February 20 this year, the S&P/ASX200 hit an all-time high of 7162 points. By 31 March, the ASX200 was down 36.5%.

 

What should you focus on when it comes to personal finance?

While it can be tempting to sell all your investments now as the market declines, this locks in your losses and puts your wealth in a weak position. If you haven’t already defensively positioned your investments, speak with a financial adviser about how to best adjust your investing over the coming months. You should also consider how to maximise your returns as the market recovers. As the author of the best-selling investment book The Intelligent Investor Ben Graham says, “Be the realist who buys from pessimists and sells to optimists”.

Investing and building wealth is a long-term game. As such, you should be investing with a long-term time horizon in mind.

 

How do you best look after your health during COVID-19?

Maintain good health by eating healthy foods and exercising regularly to make sure your immune system is as strong as possible. You also need to observe the Government’s social distancing rules and only leave home for essential activities such as going to the supermarket, pharmacy, work, or exercising.

 

What should I do next?

During this time, you may face some challenges in your finances. Your ability, however, to understand the options available to you and what the current period means on a long-term basis is key to getting through this challenging time productively. Further, making well thought-out decisions now will give you the strong foundations you need in your health and wealth as the world recovers and embarks on a new period of growth.

 

Before you make any big changes to your financial situation, speak to your Bridges financial adviser to get personalised advice for your unique situation.

The art of downsizing

The kids have finally left home and now you’re rattling around in a house much bigger than you need. If it’s time to think about downsizing, there’s more to it than simply selling one house and buying another. Here are a few things to consider.

Tax-free gain

Selling a large house and buying a townhouse or unit, perhaps in a more affordable suburb, can free up a significant sum of money which you could use to help fund your retirement or take that dream international holiday. But before you get too excited by your potential windfall, remember to take into account expenses such as agent’s fees, removalist costs and stamp duty on the new property. This will give you a better idea of how much additional cash you are likely to be left with.

Generally, any capital gains on the sale of the family home are exempt from capital gains tax (CGT). However, if the home has been used for income-producing activity, such as running a business or letting out a room, then a portion of the gain may be subject to CGT.

On the upside, downsizing may reduce your living costs. New homes are usually more energy efficient, and cost less to heat and cool than older housing stock.

Centrelink considerations

The family home is exempt from Centrelink’s age pension asset test. If qualifying for a full or part age pension is important to you, you may not want to free up too much cash when downsizing.

Indeed, some retirees actually dip into their savings to buy a higher value home. Their aim is to reduce their assessable assets and maximise their pension entitlement. This isn’t always a good idea as it increases the risk of being caught in the ‘asset rich, cash poor’ trap.

Super boost

As an incentive to downsize, Australians over the age of 65 are permitted to make a contribution to super of up to $300,000 each ($600,000 for a couple) from the proceeds of selling their home if they satisfy the eligibility requirements

The amount will be treated as a non-concessional (after-tax) contribution, and exempt from the usual restrictions. The contribution must be made within 90 days of the change of ownership. (in most cases, change of ownership would be from the settlement date).

For most people under 65, super may also be a desirable destination for most of the money freed up by downsizing. Make sure that any contributions fall within the relevant limits.

Emotional cost

While the financial benefits of downsizing can be considerable, moving house is amongst life’s most stressful events. This is particularly the case when you are giving up a home full of family memories, and parting with many prized possessions to fit into a smaller space. Just being aware that you may face an emotional reaction is a start, but be open to seeking professional support if moving does bring on a bout of the blues.

Seek financial advice

Downsizing has both financial and lifestyle dimensions, and you’ll want to make the most of any profits you realise. Talk to your Bridges financial adviser before you get the real estate agent in. He or she will work with you to craft a short-term strategy to help ensure your downsizing experience supports you in achieving your long-term goals.