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The latest Australian Prudential Regulation Authority figures show that $17.1 billion in superannuation has been withdrawn already.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.

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Learn more about superannuation

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.

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 do you calculate superannuation from a total package?

Superannuation is calculated at the rate of 9.5 per cent of your ‘ordinary-time earnings’. (For most people, ordinary-time earnings are their gross annual salary or 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.

As the Australian Taxation Office explains, some items are excluded from ordinary-time earnings. They include:

  • Overtime work paid at overtime rates
  • Expense allowances that are fully expended
  • Expenses that are reimbursed
  • Unfair dismissal payments
  • Workers’ compensation payments
  • Parental leave
  • Jury duty
  • Defence reserve service
  • Unused annual leave when employment is terminated
  • Unused long service leave when employment is terminated
  • Unused sick leave when employment is terminated

Although the superannuation guarantee is currently at 9.5 per cent, 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.

What happens if my employer goes out of business while still owing me superannuation?

If your employer collapses, a trustee or administrator or liquidator will be appointed to manage the company. That trustee/administrator/liquidator will be required to pay your superannuation out of company funds.

If the company doesn’t have enough funds, in some cases company directors will be required to pay your superannuation. If the directors still don’t pay, the Australian Securities & Investment Commission (ASIC) might take legal action on your behalf. However, ASIC might decline to take legal action or might be unsuccessful.

So there might be some circumstances when you don’t receive all the superannuation you’re owed.

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.

How do you access superannuation?

Accessing your superannuation is a simple administrative procedure – you just ask your fund to pay it. You can access your superannuation in three different ways:

  • Lump sum
  • Account-based pension
  • Part lump sum and part account-based pension

However, please note that your superannuation fund will only be able to make a payout if 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

The preservation age has 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

There are also seven special circumstances under which you can claim your superannuation:

  • Compassionate grounds
  • Severe financial hardship
  • Temporary incapacity
  • Permanent incapacity
  • Superannuation inheritance
  • Superannuation balance under $200
  • Temporary resident departing Australia

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.

What is the age pension's income test?

These are the rules for most people who want to claim the standard pension:

Single people

  • If your income per fortnight is up to $168, you’re entitled to a full pension
  • If your income per fortnight is over $168, your pension will reduce by 50 cents for each dollar over $168

Couples

  • If your income per fortnight is up to $300, you’re entitled to a full pension
  • If your income per fortnight is over $300, your pension will reduce by 50 cents for each dollar over $300

These are the rules for most people who want to claim the transitional pension:

Single people

  • If your income per fortnight is up to $168, you’re entitled to a full pension
  • If your income per fortnight is over $168, your pension will reduce by 40 cents for each dollar over $168

Couples

  • If your income per fortnight is up to $300, you’re entitled to a full pension
  • If your income per fortnight is over $300, your pension will reduce by 40 cents for each dollar over $300

For most people, the age pension cuts off if your fortnightly income exceeds these thresholds:

Category Fortnightly income
Standard pension for singles $1,944.60
Standard pension for couples living together $2,978.40
Standard pension for couples living apart due to ill health $3,853.20
Transitional pension for singles $2,038.00
Transitional pension for couples living together $3,317.00
Transitional pension for couples living apart due to ill health $4,040.00

What is lost 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.

What are reportable employer superannuation contributions?

Reportable employer superannuation contributions are special contributions that an employer makes on top of the regular compulsory contributions. One example would be contributions made as part of a salary sacrifice arrangement.

What contributions can SMSFs accept?

SMSFs can accept mandated employer contributions from an employer at any time (Funds need an electronic service address to receive the contributions).

However, SMSFs can’t accept contributions from members who don’t have tax file numbers.

Also, they generally can’t accept assets as contributions from members and they generally can’t accept non-mandated contributions for members who are 75 or older.

How can I withdraw my superannuation?

There are three different ways you can withdraw your superannuation:

  • Lump sum
  • Account-based pension
  • Part lump sum and part account-based pension

Two rules apply if you choose to receive an account-based pension (also known as an income stream):

  • You must receive payments at least once per year
  • You must withdraw a minimum amount per year
    • Age 55-64 = 4%
    • Age 65-74 = 5%
    • Age 75-79 = 6%
    • Age 80-84 = 7%
    • Age 85-89 = 9%
    • Age 90-94 = 11%
    • Age 95+ = 14%

If you want to work out how long your account-based pension might last, click here to access ASIC’s account-based pension calculator.

Is superannuation paid on unused annual leave?

If your employment is terminated, superannuation will not be paid on unused annual leave.