Due to COVID-19, people are finding themselves in financial difficulty and are needing access to their super earlier than planned. To make the choice that best serves your needs, it is important to know all your options.
Potential consequences include locking in market losses, losing insurance cover and big reductions in retirement income. Those eligible to access up to $20,000 of their super early need to balance a need for quick cash with the risk of losing life cover, locking in market losses and long-lasting damage to retirement income. If you need money, then you need money, but if you reduce savings now, it can only mean reduced savings at retirement, unless you make catch-up contributions.
More than 500,000 of an estimated 1.35 million expected applications have been received to access up to $10,000 of their superannuation in the year ending June 30 and an additional $10,000 in fiscal 2021.
To qualify for the scheme you must be unemployed, eligible to receive a JobSeeker payment or since January 1 been made redundant, had working hours reduced by 20 per cent or, if a sole trader, had business suspended or turnover cut by 20 per cent. We recommend mortgage holders feeling financially squeezed to check with their bank or other lender on repayment freezes. Check whether the freeze also applies to the interest on the debt, or whether interest continues to be incurred, it adds. Some landlords and utility providers are being flexible about payments. Home loans may have a redraw facility, which enables access to extra payments.
Locking in losses
To access super early, your fund will need to sell assets, such as shares and other investments, it owns on your behalf. Selling after several weeks of heavy losses on global markets could lock in those losses through redeeming assets at lower prices. Since the beginning of February, the S&P/ASX 200 has fallen 24.3 per cent. “You could be crystallising losses at a low point in the market,” warns Tony Catt, Director of Catapult Wealth
The COVID-19 crisis provides compelling evidence of the need to build a durable nest egg. Retirees’ finances have been directly affected. This has been under-recognised by everyone, including the government through its stimulus packages. Super is down, dividends are down, term deposits are down, rental and property prices are down.
Super insurance cover
We also warn those with low amounts in super who reduce their balances to zero will lose death and disability cover. It will not automatically be reinstated until their balance returns to $6000, he says.
This means people who are casual or part-time could remain uncovered for two to three years. This clearly has been an unintended consequence of the government’s attempt to help those in financial distress. The problem is it may actually cause an even worse financial outcome. Those considering withdrawals should check at what account balance the super fund switches off cover.
Next steps
Assess your current level of financial distress – are you experiencing debt stress or don’t you have the income necessary to support living standards. If you don’t have a household budget, consider making one to help assess your living standards. Think about your retirement plans, which includes both the lifestyle you expect and the age at which you would like to retire.
It might be worth working out exactly how much you’ll need and only withdrawing that amount, rather than the maximum $10,000 per withdrawal available. If you find yourself eligible for this option, you will need to apply through the My Gov website and once you have obtained approval you can send this to your relevant super fund to apply for access to the funds.
There are a number of alternative strategies that many clients should consider depending on their circumstances and we would encourage clients to speak directly to their advisor for specific recommendations.
If you would like to discuss your situation, please do not hesitate to email us or contact us on (08) 8172 9111.