In response to many enquiries that we have had lately about the viability of withdrawing from super, we have put together the below checklist for review before taking this last resort step. If it’s too late and you have already made the application or received the money into your bank account but now regret it, we will take you through your options. Finally, we will provide you with some other alternatives to consider if you are struggling with tight cash flow.
There is absolutely no doubt that dipping into your super early can be tempting for a wide variety of reasons. There are many of us suffering genuine hardship who really do need this lump sum cash injection. There’s those who are so accustomed to living on a tight budget that the enticing prospect of a large injection of cash to make life that bit easier is just to good to refuse. Another common temptation is a big ticket expense / goal that you’ll be able to achieve by withdrawing from your super that may have taken you far longer to otherwise obtain / achieve. Times are tough, depression is rife and there is absolutely no doubt that quick cash is a huge temptation. This is not to mention the fact that the ATO have make it fairly easy for you to obtain access to your super as a result of COVID-19.
Whilst it is tempting to tap into your super early, nothing in life is for free and cracking open your nest egg early can come at steep cost. Of course in these tough economic times there are going to be many situations arising in which people absolutely need to access their super and that is ok – we understand times are very tough for many right now. We encourage you to ensure that you have carefully weighed up the potential costs versus benefits before taking this step.
Five Key Considerations
(1) Heavy penalties apply if you are found to have illegally accessed your super early. The ATO have confirmed that if they have found that you have illegally accessed your super early, fees and severe penalties apply. These penalties also apply to promoters that encourage illegal early withdrawal of super. You’ll have to pay interest and significant penalties on your super if you have accessed it illegally. You cannot claim a personal deduction for any fee or commission a promoter takes from your super when they help you to roll over your super or set up an SMSF. If you illegally access your super early, your assessable income includes the withdrawn amount, even if you return the super to the fund later. Not sure if you are eligible to withdraw from your super? Review our blog post outlining the eligibility requirements here.
(2) Significantly less money in retirement. Remember that your super is designed to fund your retirement, therefore any early withdrawal now will impact the amount you’ll have available when you retire. More importantly, you will lose the power of compound interest on the withdrawn funds. That power can be substantial over time. Based on average Australian superannuation balances by age, the future value of money principles indicate that if you are 25 years old a withdrawal of $20K from your super now equates to approximately $95K when you reach retirement age!!!! If you are 30 you are looking at a loss of $80K and if you are 40 a loss of approx. $54k.
(3) Withdrawing your super now is just like selling your house at the bottom of the market. Why? Because your super is likely invested in balanced options which would involve a large % of it being invested in the share market. Over the long term there is a very high potential for these equities to earn decent returns. However if you pull the funds now whilst the market is low you could potentially lose a lot of money that would have been clawed back over time as the economy picks up.
(4) Potential loss of life insurance. A lump sum withdrawal from super combined with regular fund fees and insurance premiums could push your account balance below $6000. From April 1, 2020 default cover for life insurance as well as TPD and income protection cover could be automatically cancelled if you have less than $6000 in your super account. If you decide to let your insurance lapse, there are no guarantees you will be able to opt back in later on.
(5) Withdrawing your super in order to have more cash in your account to service a home loan is unlikely to improve your chances of obtaining the loan. When banks assess your eligibility for a home loan application these days, they review your bank account transactions and spending habits in detail. There is talk that banks will question large deposits into your account from your superfund and NOT factor these amounts into your home loan serviceability. If you were to make a genuine mistake and withdraw your super and then pop it back in again, banks will likely to let this slide. (This is not guaranteed).
Already withdrawn and feeling regretful?
An application can’t be withdrawn or cancelled once it has been submitted. If you have only just made the application and wish to cancel this, we recommend that you get in touch with your fund ASAP. It will take the ATO up to four business days to process your application and send your outcome letter to your myGov inbox. You may also receive an SMS notification.
If you have already received your cash but feel that you can return it, again please contact your fund to organise the next steps.
Your cash flow is tight and you could never have expected to be in this position. Totally understandable. Here are some other options to consider before you look seriously at making an early withdrawal from your super.
(1) No doubt you are probably all over the JobKeeper and JobSeeker legislation by now, however if you are not 100% across the eligibility requirements it is a great idea to review these in detail. Once you are in JobKeeper, you are in for the full 6 months and you can get in based on a reasonable projection of your May income. It is certainly worth revisiting your eligibility for both of these government benefits again just to be sure. Refer our quick reference guide for your JobKeeper eligibility here for more info.
(2) Again, by now you have likely heard all about the ATO’s Cash flow boost inventive. This generous incentive gives eligible employers tax-free cash flow boosts of between $20 and $100K delivered in the form of credits in the activity statement system. If you are behind on your BAS, it may well turn out that now is the perfect time to catch up and grab your cash flow boost. The ATO system reads Single Touch Payroll files in order to determine the cash flow boost available. If you are not already setup on Single Touch Payroll, now is the time to jump on board.
(3) The NSW Government is providing financial support to ease the pressures on small business as a result of COVID-19. If your small business or non-profit organisation has experienced a significant decline in revenue as a result of COVID-19, you may be eligible for a small business support grant of up to $10,000. This grant supports the ongoing operations of small businesses highly impacted from the COVID-19 pandemic following the NSW Public Health Order of 31 March 2020. Funds may only be used for unavoidable business expenses such as utilities, council rates, telecommunication charges, insurance payments, professional advice, wages for an employee who is not eligible for JobKeeper, franchise fees and paying creditors. To be eligible for this grant, you must: be based in NSW, be a small business, be registered with an ABN as at 1 March 2020 and have an annual turnover of more than $75,000 (a Business Activity Statement must be provided as evidence). Where a small business does not submit a BAS to the Australian Tax Office, and meets all other criteria, the small business should contact Service NSW to discuss further. In these cases, an income tax declaration may be accepted as evidence of an annual turnover of $75,000. You must also: employ 1-19 full-time workers as at 1 March 2020, be able to report a payroll below the NSW 2019-2020 payroll tax threshold of $900,000, have been highly impacted by Public Health (COVID-19 Restrictions on Gathering and Movement) order 2020 effective on 31 March 2020, have experienced at least 75% decline in turnover compared to the same two-week period in 2019, as a result of COVID-19 and you must have unavoidable business costs not otherwise the subject of other NSW and Commonwealth Government financial assistance measures.
(4) Prepare a cash flow forecast. It seems obvious and maybe a little tedious, but taking the time to sit down and map out what you spend and why can really make an enormous difference to your attitude towards money and your bank balance. You may find yourself shocked when you realise where a lot of your money is actually going. Once you break those bad spending habits and set new ones, you might be pleasantly surprised to realise how satisfied you feel with your new approach to managing your finances. Our team have created a free cash flow forecast excel template for those of you who would like to spend some time creating an effective budget. Shoot us an email to request your copy.
(5) Catch up on your tax affairs. If you are behind on your tax affairs, you may be unaware that you have a nice big tax refund owing to you. If you are behind on your tax but overwhelmed at the thought of it; we suggest you jump onto our website and submit your details to our team for fast and thorough tax return preparation. You will be surprised how quick and easy we have made this process!
The Bottom Line
While temporary access to super due to the coronavirus, or access under the usual severe financial hardship rules, provides a welcome safety net, it should be regarded as a last resort. It’s worth seeking independent professional advice about whether an early release of your super is appropriate for your individual circumstances. If you are able to access alternative sources of income from Centrelink or government agencies to get you through a tough patch, we recommend this avenue as the the preferred option.