An uncertain economy usually means a reassessment of your investment portfolio and projected income streams—including your super. During the COVID pandemic, over 3 million Australians withdrew funds from their super before they reached retirement age. The government lifted the traditional restrictions for early withdrawals during the pandemic, and according to the Australian Tax Office (ATO), over $30 billion came out of super accounts during this time. Now that the pandemic has subsided and the economy is humming along again, many people are wondering about the wisdom of taking out super funds ahead of retirement. Are there situations where it's not a bad idea?
Basic super withdrawal rules
The ground rules regarding your superare pretty simple. Here's when you can withdraw without penalties:- When you're 65 or over, even if you're still working
- When you reach preservation age (55-60) and retire
- When transitioning to retirement but continuing to work
- You are behind on your rent (you don't own the property)
- You are behind on your mortgage or council rates, but the bank or council is not threatening repossession or sale
- You want to buy an investment property
- You need less than $1000 and more than $10,000
- You have already made one withdrawal in the past 12 months
- You want to make a lump sum payment on your mortgage
- You want to buy a new car
Financial hardship
The main definition of financial hardship is that you are at risk of losing your home, but you must meet the guidelines for a penalty-free withdrawal. If you need help with your mortgage payments to avoid foreclosure, you may be able to access super funds if any of these apply to you:- The property in danger of foreclosure is your primary residence
- The mortgage is in your name and you are the responsible party
- Your council is threatening you with legal action—repossession or selling your home— if you are behind on your council rates
- The bank is also threatening to take your property due to payments in arrears
- You have no other way on making the repayments, such as selling other assets
Compassionate grounds
This category of allowed early super access revolves around illness, death, and incapacity. These are the broad outlines of what qualifies as compassionate grounds. You and your dependents are included in these regulations.- Medical treatment or transport
- Palliative care
- Accommodation for a disability
- Death and funeral expenses
First home super saver scheme (FHSS)
In order to help first home buyers, you can make voluntary contributions to your superannuation account that can then be withdrawn in order to buy a home. To be eligible you must:- Have made voluntary contributions to your superannuation after July 2017
- Not own or have previously owned property in Australia
- Not have previously accessed the FHSS scheme
- Live in the house you are buying as soon as possible
- Intend to occupy the home for at least 6 months within the first 12 months of purchase
Impact and implications for early super withdrawals
The biggest reason that early withdrawal is the last resort is that when you take early withdrawal, your super balance is reduced, but you also lose access to compounded interest and long-term gains from those cashed-out investments. For example, if you take out $10,000 early in your career, you could diminish the size of your retirement nest egg by six figures.You'll likely pay taxes on early super withdrawals
The ATO has designed the superannuation program for retirement benefits and discourages any early access to super funds in the form of a relatively high tax rate on the money you take out. Even if you're experiencing severe financial hardship and qualify for the withdrawal, there is no special or lower tax rate that applies. If you're under 60, you'll get a tax hit between 17% and 22% on any money you take out. So if you need $6000, the ATO rules only allow you to get an average of $4800 in actual cash—about 80%. Early super payment is also counted towards your taxable income for the year. So not only have you paid about 20% in taxes to access the cash, you'll have to include it come tax time. If you receive any government welfare, an early payout can also impact your benefit status. Also, your insurance coverage may be predicated on maintaining a minimum balance in your super—check with your super fund administrator for all the ramifications of an early withdrawal. The bottom line is that the ATO considers early access a last resort for financial relief, and they place a high burden on people who do take out their money. You should go over your plans with your tax advisor before you finalise any such transaction.Factors that determine taxes on early withdrawal
If you take out the money on compassionate grounds, you may qualify for some tax relief. Permanent incapacity could mean lower taxes, but that is dependent on several factors:- Your age at the time of withdrawal
- Is the payment a lump sum or income stream?
- Are the funds tax-free or taxable?