How dipping into your superannuation during the COVID-19 crisis could lose you money

How dipping into your superannuation during the COVID-19 crisis could lose you money

Australians could cop major losses by dipping into their superannuation to make it through challenging conditions caused by the coronavirus pandemic, superannuation experts warn.

Under the new scheme introduced in the Morrison government’s $66 billion stimulus package, those whose income have fallen by at least 20 per cent due to the impacts of COVID-19 will be allowed to withdraw a maximum of $10,000 from their nest eggs before the start of the next financial year on July 1. They will also be able to apply to take out another payment of up to $10,000 between July and September.

The withdrawals will be tax-free and will not affect an individual’s welfare payments.

Superannuation research house SuperRatings chairman Jeff Bresnahan labelled it a “lose-lose” scenario and said for those applying to withdraw from their nest egg, some may receive as little as 70 cents for every dollar they would have received two months ago.

“Opening the floodgates to allow virtually anyone and everyone to drag up to $20,000 out of their super fund, with the current market volatility, is not the answer,” he said.

Taking $20,000 out of someone the age of 25 now could mean missing out on potentially more than $130,000 when they retire, while the withdrawal from a 35-years-old’s super account could forego some $80,000 in future benefits, according to a SuperRatings analysis.

Super chart by SuperRatings

Source: SuperRatings. Assumptions: based on ASIC’s MoneySmart calculator using a Growth option with an assumed investment return of 5.0% before fees and taxes on earnings.

What could you do if you’re in financial hardship?

Chief executive of Industry Super Australia Bernie Dean said Australians who are suffering financially should consider all other forms of government economic support before accessing their superannuation early, a measure which should be used “only as a last resort”.

“Some members will have lost their jobs or had their hours dramatically reduced and Industry SuperFunds will do all they can to help them,” Mr Dean said.

“But members should tread carefully and only think about cracking open their super after they’ve taken up the extra cash support on offer from the government – super should be the last resort given the impact it can have on your retirement nest egg.

“Members need to know that taking your super now is like selling a house at the bottom of the market – you’ll lose money you would probably claw back overtime.”

FairVine Super’s head of customer experience Rachel Hamlen agreed that individuals should think twice about dipping into their nest eggs, as draining it unnecessarily may cause you serious financial hardship in the future.

“If you do need to access the payment, consider taking only what you’ll need to get by, and also reinvesting money you don’t end up using back into your super,” she said.

How has the coronavirus affected our superannuation?

COVID-19 and the uncertainty around the extent of its impacts has driven investors across Australia and the world to sell in the share and property markets.

This has seen the median growth fund decline by 3.1 per cent in February and by another 10.5 per cent in the first half of March, according to the latest figures from Chant West.

Growth funds are where most Australians have their superannuation invested.

But Chant West’s senior investment research manager Mano Mohankumar said the figures are fluctuating everyday due to volatility in the markets.

Mr Mohankumar said the 27 per cent drop in Australian and international shares since the end of January has hit the performance of super funds.

But the loss of the median growth fund has been limited to about 13 per cent, thanks to diversification, which is a strategy that spreads investments in a portfolio across a mix of growth and defensive asset sectors.

“This is still a material reduction in account balances, but it comes on the back of the tremendous run funds have had since the end of the global financial crisis (GFC),” he said.

He noted that the median growth fund recorded average increases of 9.3 per cent a year between the GFC low point in early 2009 to the end of January 2020. The typical long-term return objective of a growth fund is 5.5 per cent to 6 per cent per annum.

Market to bounce back sooner or later

Mr Mohankumar advised against making panic decisions, such as withdrawing from nest eggs or switching super funds, and said it was “very risky” to try to time markets at this stage.

“The negative returns we’ve seen in recent weeks are ‘unrealised’ losses, so you don’t actually lock them in unless you take your money out or switch to a lower risk option,” he said.

“If you do that, then not only do you turn those paper losses into real ones, but you also miss out on the market rebound which will come sooner or later.”

He added that it was also common for older superannuation holders to leave their super untouched in the fund when they retire.

“We encourage everyone to remember that superannuation is indeed a long-term investment, and if the investment option you are in suited you two months ago, then it is most likely the one to stick with now.”

However, if you don’t already know, it could be worthwhile to find out how much your super provider is charging you in fees. A super fund demanding high fees may not be a good idea in times of economic turmoil, when many funds are returning losses.

If the fees are higher than what you are comfortable with, consider using RateCity’s comparison tool to look at what your superannuation options are.

In the end, it can be a good move to speak to a financial adviser who will consider your personal situation before making any decisions relating to your superannuation.

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Learn more about superannuation

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 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 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.

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 do you calculate superannuation?

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.

How long after divorce can you claim superannuation?

You or your partner could be forced to surrender part of your superannuation if you divorce, just like with other assets.

You can file a claim for division of property – including superannuation – as soon as you divorce. However, the claim has to be filed within one year of the divorce.

Your superannuation could be affected even if you’re in a de facto relationship – that is, living together as a couple without being officially married.

In that case, the claim has to be filed within two years of the date of separation.

Either way, the first thing to consider is whether you’re a member of a standard, APRA-regulated superannuation fund or if you’re a member of a self-managed superannuation fund (SMSF), because different rules apply.

Standard superannuation funds

If your relationship breaks down, your superannuation savings might be divided by court order or by agreement.

The rules of the superannuation fund will dictate whether this transfer happens immediately, or in the future when the person who has to make the transfer is allowed to access the rest of their superannuation (i.e. at or near retirement).

Click here for more information.

SMSFs

If your relationship breaks down, you must continue to observe the trust deed of your SMSF.

So if you and your partner are both members of the same SMSF, neither party is allowed to use the fund to inflict ‘punishment’ – such as by excluding the other party from the decision-making process or refusing their request to roll their money into another superannuation fund.

This no-punishment rule applies even if the two parties are involved in legal proceedings.

Click here for more information.

Financial consequences

Superannuation funds often charge a fee for splitting accounts after a relationship breakdown.

Splitting superannuation can also impact the size of your total super balance and how your super is taxed.

Click here for more information.

Can I take money out of my superannuation fund?

Superannuation is designed to provide Australians with money in their retirement. The government has strict rules around when people can take that money out of their fund because it wants to prevent people eroding their savings before they reach retirement.

As a general rule, you can only take money out of your superannuation fund when you reach:

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

That said, you can take money out of your superannuation fund early based on one of these seven special conditions:

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

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 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 create a superannuation account?

Before you create a superannuation account, you’ll need to check if you’re allowed to choose your own fund. Most Australians can, but this option doesn’t apply to some workers who are covered by industrial agreements or who are members of defined benefits funds.

Assuming you are able to choose your own fund, the next step should be research, because there are more than 200 different superannuation funds in Australia.

Once you’ve decided on your preferred superannuation fund, head to that provider’s website, where you should be able to fill in an online application or download the appropriate forms. You’ll need your tax file number (assuming you don’t want to be charged a higher tax rate), your contact details and your employer’s details (if you’re employed).

How do you set up superannuation?

Before you set up a superannuation account, you’ll need to check if you’re allowed to choose your own fund. Most Australians can, but this option doesn’t apply to some workers who are covered by industrial agreements or who are members of defined benefits funds.

Assuming you are able to choose your own fund, the next step should be research, because there are more than 200 different superannuation funds in Australia.

Once you’ve decided on your preferred superannuation fund, head to that provider’s website, where you should be able to fill in an online application or download the appropriate forms. You’ll need your tax file number (assuming you don’t want to be charged a higher tax rate), your contact details and your employer’s details (if you’re employed).

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.

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.