The $20,000 decision on early access to super

As part of its economic response to the coronavirus crisis, the Federal Government is allowing those facing financial hardship to access their superannuation in two tranches of $10,000. Whether or not to ‘tap’ your super is an important decision. You need to think about the trade-off between your present situation and the one you may face in retirement.

Be aware that most people are myopic (we put much more weighting on the present versus the future) which is one of the reasons why governments around the world have mandatory savings schemes designed to provide support the funding of retirement.

To date, 620,000 people have already registered to access their super, so this policy has become a major issue for retirement savings and superannuation funds.

Some numbers to help you decide

Withdrawing your super now, all else equal, can only reduce savings at retirement, which means less income after you stop working. The degree of impact is unknown so we need to make some assumptions.

Using assumptions similar to those made by many super funds to provide retirement estimates on annual statements to members, we can estimate the possible impact on your super savings at retirement (in today’s dollars) assuming you retire at age 67.  

In the table below, we assume that your savings grow annually at a rate of 3% above inflation less administration fees (assumed to be 0.5%). 

There is a huge range in estimates of the impact of early access on retirement savings. Most disappointing is the ABC’s claim that the impact could be $500,000. This is clearly incorrect.

It is just as important to consider the possible impact on your spending in retirement:

The change in income above does not consider the age pension. Depending on your financial circumstances, the age pension may form a significant component of your income in retirement. Due to means assessment, a lower super balance at retirement may actually slightly increase the amount of age pension you receive.

To consider your own situation in more detail, play around with the many assumptions and assess different scenarios, financial calculators such as ASIC Moneysmart retirement planner are informative and easy to use.

Other factors to consider

There are many other factors to consider:

• Think about your household situation. Most people retire as a couple meaning that your joint financial situation is the one to focus on. An early access decision should be made jointly.
• Not everything to do with your retirement plan is in your control. Future investment returns are uncertain, as highlighted by the current crisis. And many people do not choose their retirement age (they often ‘retire’ because they can’t find work). Planning for a retirement buffer is something to consider.
• You may be pulling money out of superannuation at a point in time when asset prices are depressed. While it is true that equity, credit and property assets are lower than a few months ago, it is far from certain that asset prices will rise over the short to medium term.
• You may have the ability to catch up on your retirement savings plan in better times. However, this takes discipline so perhaps plan for how you will achieve this.

Making a balanced decision

Superannuation combines mandatory savings with the power of compounding investment returns to produce better retirement outcomes and reduce the burden of funding the age pension on future tax payers. If you can leave your savings pot untouched then that is better for your retirement outcome. Super is also a tax-advantaged savings environment.

However, you may be feeling financial stress right now and that is not healthy. The early access scheme is designed to help people in this situation.

How to make a sensible decision? It may make sense to work through the following:

• Assess your current level of financial stress. Are you experiencing debt problems? Do you have the income to support your living standards? If you don’t have one already, consider creating a household budget to help you assess living standards.
• Can you make some adjustments to your lifestyle? Perhaps reduce some spending on non-essential items during the crisis to make your household budget more sustainable.
• Have you accessed all the assistance programs which are available to you? There are a range of government support schemes to help those experiencing financial difficulty in the present environment.
• Think about your retirement plans (lifestyle but also the age at which you would like to retire) and consider the amount of retirement income that is required to support that plan. Include other parts of your life plan such as home ownership.
• Consider whether it is necessary to access your super once or twice (the early access programme allows for two separate withdrawals of up to $10,000 each).

Financial advice is valuable in situations like this. However, for some it may be expensive relative to your financial position. There are also financial counselling services available which may provide basic assistance.

For many people, the government’s early access to super scheme may help to alleviate financial stress. But tapping your retirement savings pool will naturally impact your retirement. Take the time to make a considered decision, especially if isolation provides the chance to do some research.

For more details on who can access super early, see here. Note also that authorities are warning that some promoters are offering early access schemes (such as transferring your super into an SMSF). These schemes are often illegal and heavy penalties apply. For more information, refer to Illegal early release of super.

This is not financial advice and it does not consider any individual circumstances. An ASIC class order allows super funds to provide retirement projections on member statements. A similar approach is used for the projections in this article they are estimates only.

David Bell is Executive Director of The Conexus Institute, a not-for-profit research institution focused on improving retirement outcomes for Australians.