Should you withdraw your super

As part of its economic support package, the Government has made it easier to access your super. Individuals can access $20,000 between now and September 2020 ifs you satisfy one or more of the following:

• Unemployed.
• Eligible to receive a job seeker payment, youth allowance for jobseekers, parenting payment, special benefit or farm household allowance.
• Have been made redundant or your hours were reduced by 20%.
• Are a sole trader, your business has had a 20% reduction in turnover.

There has been a lot written in the media recently about how people could lose up to $200,000 if they withdrew the $20,000 now. While this is partially true, it doesn’t help those that need it now.

In this article I will try to shed some light on who should take it out and who shouldn’t. Broadly there are four different reasons people need to access their super. Note I have not included those that want to take it out just to spend on luxury items, as clearly they shouldn’t do it!

1. To help get their family and/or business through the next six months.

If you need the money to stop you losing your house or business, you may be in the small group of people that should do it. However, make sure you have explored all other opportunities. This includes calling your bank, landlord or franchisor to discuss new financial arrangements. Also really consider if your business is going to survive. Be honest with yourself. There is no point taking money from your super if the business is going to fold regardless.

If you have done all this and still need it, then go for it. However, I suggest you stop reading the articles about how much worse off you will be, as they aren’t helpful to you right now.

Before you contact the ATO, I recommend you call a financial counsellor. They should be able to check if there is any other way to help get you through this time. http://www.fcan.com.au/

If you know people likely to be in this category, offer them support not judgement. Remember that their focus is not a more comfortable retirement, but getting through the next six months.

2. To pay down their mortgage.

Over the long term, return from most growth assets such as shares and property (which most super funds invest in) outperform mortgage rates by about 4% a year. If you took out the whole $20,000, over 10 years you would be $10,000 worse off and over 30 years you would be over $60,000 worse off.

The only people in this group that should consider taking money out of their super to pay down their mortgage are those looking to retire in the next few years.

3. To invest outside of super.

For those wanting to take it out and invest it outside of super, there are two big reasons not to do this.

Super is one of the best legal tax minimisation schemes currently available. If you withdrew the whole $20,000 to invest elsewhere and earn more than $90,000 per year, you would be paying around $40,000 more tax over the next 30 years.

Secondly, when the market falls, a lot of people think they could do better than the fund managers. Research shows that over the long term 75% of professional fund managers do not beat the average of the market. Individual investors generally do worse. Also, if you want to invest in individual shares, most super funds offer this option.

4. To invest in themselves.

Depending on your circumstances, we always recommend investing in yourself or your business (assuming it is a profitable business or one with great prospects). If you want to take the $20,000 to study and this will lead to an increased income of $20,000 a year, there is a very good argument for doing it. Likewise if this $20,000 will boost business profit by $10,000 a year, then it may be worthwhile. However, with both of these make sure there aren’t other ways you could still do what you want.

Finally, if you are thinking about taking your money out of super, look at your life and income protection insurance. There is a chance you could lose this. It would be terrible if one solution created another problem.