The $20k cost of withdrawing your super early

The $20k cost of withdrawing your super early

Millions of Australians have already accessed their super early due to the impacts of the COVID-19 crisis, however there is a downside to raiding your nest egg – and it could seriously cost you.

The government’s early super release scheme has allowed 2.4 million Australians to access up to $10,000 in superannuation each this financial year, with the option of withdrawing another $10,000 from July 1st.

The latest Australian Prudential Regulation Authority figures show that $17.1 billion in superannuation has been withdrawn already. This is an average of $7,492 per person.

However, RateCity analysis has found that Aussies dipping into their super now may have tens of thousands less in retirement.

The long-term cost of accessing your super early

Millions of Australians have lost their job or are now on reduced incomes as a result of COVID-19, and unfortunately many do not have other options up their sleeve. Early release super money is intended to help them through one of the toughest tests to their finances they’ve had to face.

However, as superannuation is there to support you in retirement, raiding your nest egg may make a serious dent in your final balance.

On Wednesday, round two of the early release super scheme kicks off again, which means many who have already taken up to $10,000 can go and grab another $10,000.

There’s no rule against double dipping, you just need to meet the eligibility criteria, which includes:

  • You need to be a citizen or permanent resident of Australia or New Zealand,
  • Anyone who is currently unemployed,
  • Employees who’ve had their hours reduced by 20 per cent or more, and
  • Business owners who’ve had a reduction in turnover of 20 per cent or more.

Cost of withdrawing superannuation early

Age Withdrawing $10K Withdrawing $20K
30 $21,516 $43,032
40 $17,512 $35,024
50 $14,253 $28,506

Source: Australian Securities and Investments Commission Superannuation Calculator. Notes: Assumes income of $50k and retirement at 67. See full assumptions at the end.

RateCity analysis found that an average 30-year-old who takes out $10,000 now may have $21,516 less in retirement.

Further, that same 30-year old who now plans on taking out an additional $10,000 on Wednesday could be over $43,000 worse off at retirement.

This analysis shows that the younger you are, the bigger the impact withdrawing super early may have on your final balance at retirement.

  • If you are planning on accessing your super early, make sure you meet the eligibility criteria before applying. There are fines of up to $12,600 for making misleading claims.

Ways to minimise the damage

If you’ve already accessed your superannuation early, it goes without saying that you need to be careful how you spend it.

You’ll want to do your best to avoid accessing your super just to rack up debt again or spending it on things like gambling.

What to consider when spending your early super release funds:

  1. Only take out what you need and use the money wisely. This is your nest egg. Don’t use it as an opportunity to buy a new TV.
  2. For people who use it to wipe their credit card debt, don’t make the same mistake twice. Cut up the card and close your accounts so you don’t start the debt process again.
  3. 70 per cent of Australians have life insurance through their super. If your balance is too low, you might lose it. Check with your super fund what the minimum balance is to qualify for insurance.
  4. Once your finances have settled again, consider salary sacrificing or making contributions back into your super to replenish your nest egg.

Assumptions:

  • The estimates provided use the assumptions and default values from ASIC MoneySmart's Superannuation Calculator based on an income of $50,000.
  • The estimates provided are shown in today's dollars, which means they are adjusted for inflation by 4.0 per cent p.a. (2.5 per cent p.a. due to the rising cost of living [CPI inflation] and a further 1.5 per cent p.a. for the cost of rising community living standards).
  • Investment returns are defaulted to an assumed rate of investment return before tax and fees of 7.5 per cent p.a.
  • Investment fees are assumed to be 0.85 per cent p.a.
  • Assumed tax on earnings is 7.0 per cent.

Did you find this helpful? Why not share this news?

Advertisement

RateCity

Money Health Newsletter

Subscribe for news, tips and expert opinions to help you make smarter financial decisions

By submitting this form, you agree to the RateCity Privacy Policy, Terms of Use and Disclaimer.

Advertisement

Learn more about superannuation

How much is superannuation?

Superannuation is currently 9.5 per cent – which means that your employer must pay you superannuation equivalent to 9.5 per cent of your salary.

The ‘superannuation guarantee’, as it is known, has been at 9.5 per cent since the 2014-15 financial year. It is scheduled to rise to 10.0 per cent in 2021-22, 10.5 per cent in 2022-23, 11.0 per cent in 2023-24, 11.5 per cent in 2024-25 and 12.0 per cent in 2025-26.

How is superannuation calculated?

Superannuation is calculated at the rate of 9.5 per cent of your gross salary and wages. So if you had a salary of $50,000, your superannuation would be 9.5 per cent of that, or $4,750. This would be paid on top of your salary.

The ‘superannuation guarantee’, as it is known, has been at 9.5 per cent since the 2014-15 financial year. It is scheduled to rise to 10.0 per cent in 2021-22, 10.5 per cent in 2022-23, 11.0 per cent in 2023-24, 11.5 per cent in 2024-25 and 12.0 per cent in 2025-26.

Is superannuation included in taxable income?

Superannuation is not included when calculating your income tax. So if you have a salary of $50,000, your assessable income would be $50,000, not $50,000 plus superannuation.

That said, superannuation itself is taxed. It is generally taxed at 15 per cent, although if you earn less than $37,000, you will be reimbursed up to $500 of the tax you paid.

What is the superannuation rate?

The superannuation rate, or guarantee rate, is the percentage of your salary that your employer must pay into your superannuation fund. The superannuation guarantee has been set at 9.5 per cent since the 2014-15 financial year. It is scheduled to rise to 10.0 per cent in 2021-22, 10.5 per cent in 2022-23, 11.0 per cent in 2023-24, 11.5 per cent in 2024-25 and 12.0 per cent in 2025-26.

How much is superannuation in Australia?

Superannuation in Australia is currently 9.5 per cent – which means that your employer must pay you superannuation equivalent to 9.5 per cent of your salary.

The ‘superannuation guarantee’, as it is known, has been at 9.5 per cent since the 2014-15 financial year. It is scheduled to rise to 10.0 per cent in 2021-22, 10.5 per cent in 2022-23, 11.0 per cent in 2023-24, 11.5 per cent in 2024-25 and 12.0 per cent in 2025-26.

Is superannuation taxed?

Superannuation is taxed. It is generally taxed at 15 per cent. However, if you earn less than $37,000, you will be automatically reimbursed up to $500 of the tax you paid. Also, if your income plus concessional superannuation contributions exceed $250,000, you will also be charged Division 293 tax. This is an extra 15 per cent tax on your concessional contributions or the amount above $250,000 – whichever is lesser.

What age can I withdraw my superannuation?

You can withdraw your superannuation (or at least some of it) when you reach ‘preservation age’. The preservation age is based on date of birth. Here are the six different categories:

Date of birth Preservation age
Before 1 July 1960 55
1 July 1960 – 30 June 1961 56
1 July 1961 – 30 June 1962 57
1 July 1962 – 30 June 1963 58
1 July 1963 – 30 June 1964 59
From 1 July 1964 60

When you reach preservation age, you can withdraw all your superannuation if you’re retired. If you’re still working, you can begin a ‘transition to retirement’, which allows you to withdraw 10 per cent of their superannuation each financial year.

You can also withdraw all your superannuation once you reach 65 years.

What is a superannuation fund?

A superannuation fund is an institution that is legally allowed to hold and invest your superannuation. There are more than 200 different superannuation funds in Australia. They come in five different types:

  • Retail funds
  • Industry funds
  • Public sector funds
  • Corporate funds
  • Self-managed super funds

Retail funds are usually run by banks or investment companies.

Industry funds were originally designed for workers from a particular industry, but are now open to anyone.

Public sector funds were originally designed for people working for federal or state government departments. Most are still reserved for government employees.

Corporate funds are arranged by employers for their employees.

Self-managed super funds are private superannuation funds that allow people to directly invest their money.

What are concessional contributions?

Concessional contributions are pre-tax payments into your superannuation account. The payments made by your employer are concessional payments. You can also make concessional contributions with a salary sacrifice.

Can I buy a house with my superannuation?

First home buyers are the only people who can use their superannuation to buy a property. The federal government has created the First Home Super Saver Scheme to help first home buyers save for a deposit. First home buyers can make voluntary contributions of up to $15,000 per year, and $30,000 in total, to their superannuation account. These contributions are taxed at 15 per cent, along with deemed earnings. Withdrawals are taxed at marginal tax rates minus a tax offset of 30 percentage points.

Voluntary contributions to the First Home Super Saver Scheme are not exempt from the $25,000 annual limit on concessional contributions. So if you pay $15,000 per year into the First Home Super Saver Scheme, you have to make sure that you don’t receive more than $10,000 in superannuation payments from your employer and any salary sacrificing.

Can I choose a superannuation fund or does my employer choose one for me?

Most people can choose their own superannuation fund. However, you might not have this option if you are a member of certain defined benefit funds or covered by certain industrial agreements. If you don’t choose a superannuation fund, your employer will choose one for you.

How do you pay superannuation?

Superannuation is paid by employers to employees. Employers are required to pay superannuation to all their staff if the staff are:

  • Over 18 and earn more than $450 before tax in a calendar month
  • Under 18, work more than 30 hours per week and earn more than $450 before tax in a calendar month

This applies even if the staff are casual employees, part-time employees, contractors (provided the contract is mainly for their labour) or temporary residents.

Currently, the superannuation rate is currently 9.5 per cent of an employee’s ordinary time earnings. This is scheduled to rise to 10.0 per cent in 2021-22, 10.5 per cent in 2022-23, 11.0 per cent in 2023-24, 11.5 per cent in 2024-25 and 12.0 per cent in 2025-26.

Employers must pay superannuation at least four times per year. The due dates are 28 January, 28 April, 28 July and 28 October.

How does superannuation work?

Superannuation is paid by employers to employees, at least once every three months. The ‘superannuation guarantee’ is currently 9.5 per cent – which means that your employer must pay you superannuation equivalent to 9.5 per cent of your salary. The guarantee is scheduled to rise to 10.0 per cent in 2021-22, 10.5 per cent in 2022-23, 11.0 per cent in 2023-24, 11.5 per cent in 2024-25 and 12.0 per cent in 2025-26.

Superannuation is generally taxed at 15 per cent. However, if you earn less than $37,000, you will be automatically reimbursed up to $500 of the tax you paid. Also, if your income plus concessional superannuation contributions exceed $250,000, you will also be charged Division 293 tax. This is an extra 15 per cent tax on your concessional contributions or the amount above $250,000 – whichever is lesser.

You can withdraw your superannuation when you meet the ‘conditions of release’. The conditions of release say you can claim your super when you reach:

  • Age 65
  • Your ‘preservation age’ and retire
  • Your preservation age and begin a ‘transition to retirement’ while still working

 

How do you find superannuation?

Lost superannuation refers to savings in an account that you’ve forgotten about. This can happen if you’ve opened several different accounts over the years while moving from job to job.

You can use your MyGov account to see details of all your superannuation accounts, including any you might have forgotten. Alternatively, you can fill in a ‘Searching for lost super’ form and send it to the Australian Taxation Office, which will then search on your behalf.