For everyone The perils of pulling your super

The federal parliament recently voted to allow an individual experiencing financial difficulty to apply to the Australian Taxation Office to make an early withdrawal from their superannuation account. Withdrawals can be up to $10,000 this financial year, then a further $10,000 next financial year until 24 September. Any withdrawals will be tax-free.

Provision to make a withdrawal has existed for many years under hardship provisions in the regulations, but there have been many hurdles to jump. Ostensibly, it will now be easier.

But is it a wise move to withdraw superannuation money invested for use in retirement? Such a move should be regarded as a last resort, given there may be other financial options available to get through this difficult period.

Investment markets have fallen dramatically and, as a result, so have super account balances. Conventional wisdom is that you don’t sell an asset when it drops in value, when there is every chance it will recover. This is certainly true of super, which is a long-term savings and investment strategy that takes advantage of the benefits of compound interest. (For members who are salary sacrificing into super, the fall in market values means you are buying at lower prices – a major advantage that will eventually boost your account balance.)

Modelling undertaken by Vanguard Investment Managers indicates that for a 30-year-old employee on a salary of $60,000 with a super balance of $25,000, the difference in super outcomes by age 65 would be $1,535,000, compared to $1,239,000 if they took the option to withdraw $20,000 over the next few months. That is a significant difference of about $300,000 – a high price to pay!

A word of warning: it has been reported that some real estate agents are encouraging tenants in financial difficulty to make withdrawals from super to pay rent. This behaviour is illegal and opportunistic – real estate agents cannot provide financial advice; only financial advisers can provide advice in the best interest of their clients.

There are also some politicians, and fellow travellers in the business world, encouraging withdrawals in the hope it will somehow damage the existing superannuation system. Treat such comments with the disdain they deserve.