Is taking $10,000 from super always a bad thing?

In response to COVID-19 (aka “Coronavirus”), the Australian Government has approved limited early access to $10,000 of superannuation.

For eligible Australians, this means they could pull $10,000 from their super balance twice, $10k before June 30th and $10k in the first few months after July 1st, 2020.

The most important thing to know is there are super withdrawal eligibility criteria, so COVID-19 early access to super does not apply to everyone. You will have to tick one of these boxes:

• You’re unemployed
• You are eligible for some Centrelink benefits, including a Job Seeker payment (this includes a lot of Aussies right now), special benefit or parenting allowance
• You were made redundant or had your working hours cut by 20 per cent (or more) after January 1st, 2020. This also applies to sole traders or contractors.

One of the most popular topics and questions we field from our members and tens of thousands of Rask Australia readers and listeners is about early access to super. So much so that we created an animated video for Rask Education, it’s part of our free superannuation course.

Please pay close attention…

What I’m about to say about super withdrawals is going to ruffle a few feathers amongst my industry colleagues, advisers and various bodies. So please pay very careful attention to what I’m saying and what I’m not saying. super is the best left untouched for many reasons. And always consider how your insurance might be impacted if you do something to your super account.

With that disclaimer in place, here goes:

For some Australians, taking money from super early is not necessarily a bad thing. 

Let me explain…

Do you need the money?

• I don’t have an emergency cash balance
• I have reached out to Centrelink, the National Debt Helpline or a financial adviser/counsellor
• I know the risks but…
• I still need money to help with short-term cash flow

If you answered ‘yes’ to the three statements above, taking some money from super is one option to consider because it will probably help you avoid falling into dangerous short-term debt spirals (credit cards, Buy Now Pay Later, personal loans, etc.).

According to data from a 2016 survey by the ABS over 1.3 million Australian households report having been impacted by financial stress. For example, households unable to raise $2000 of cash within a week (to cover an emergency) are financially stressed. The Department of Education dived into the results in this article.

My concern is that the people who may need super for cash flow often don’t have access to a financial adviser and can be unaware (or too stubborn and not willing) to see a FREE financial counsellor.

It’s only $10,000…

While it might sound like ‘it’s just $10,000’, it’s a lot more than that.

Here are the real costs of pulling $10k from your super today.

Source: writer notes

For example, if your super fund achieves a 7 per cent return the $10k taken out of super now is actually worth $76,000 to your retirement in 30 years. In other words, it would cost you $7.60 for every $1 you take out. Ouch.

I’ve taken the $10k. Now what?

If you go ahead and take money out of super to cover a financial fire or short term cash flow you must commit yourself to replace the money as soon as possible. See the table above.

You can add extra money to Super in a variety of ways, including direct deposit, Bpay or asking your employer to put, say, 12 per cent of your pay into super instead of ~10 per cent. This will likely reduce the pay packet you receive in your pocket, but again it could be like investing $1 and getting $7 back in 30 years. That’s a good deal.

Another take on the super debate…

I think the Government’s super move is misguided. There are far better ways to lessen the economic impact of Coronavirus. But that’s a fight for another article. Back to the topic at hand…

Is it always a bad idea to take money from super? And who might be actively considering it for the right reasons?

I think taking money from super is a reasonable option for people who:

• Are good with money and have experience investing (i.e. you won’t be tempted to spend it)
• Are likely to go back to being actively employed in a few months
• Are in a good financial position (e.g. you have not costly debt but you have 3-6 months of cash in an emergency savings account, offset or redraw facility)

Like me, many young and middle-aged Australians probably won’t want to wait 30-50 years to access their money from super. What’s more, the super system is becoming less advantageous as the tax benefits and increased regulation constantly shift the goalposts. The Government has been meddling in the giant Super honey pot for years and I highly doubt we’ve seen the last – or the worst – of it.

So hypothetically if I were eligible for the super withdrawal I would do it. I’m a long-term investor who is confident I do not need the money in the short-term and I believe I can invest my money better than my super fund (I do not have a self-managed super fund).

Takeaway

Right now, there are many benefits and incentives up for grabs for many Australians. The $10,000 super withdrawal is just one new incentive to consider, and it should probably be the last resort.

So if you have a financial adviser, free financial counsellor, or an accountant (especially important for small businesses) book in a meeting.

That said, while I’m NOT advocating for everyone to take their money from super I know there are many Aussies who will have no choice. And then there are some people (like me) who will be looking at the super rules for first-home buyers, early access to Super, tax deductions for adding extra, uber-low interest rates, special banking packages, small business benefits and many other support benefits that we’re not likely to see again for years and thinking to themselves…

Drew Meredith

Drew is publisher of the Inside Network's mastheads and a principal adviser at Wattle Partners.