Early release of Superannuation - short term gain for long term pain?

The Stanford Marshmallow experiment - a widely published psychological experiment, place a child in a room with a single marshmallow, promising them that they will get another marshmallow if they do not eat the first one for an unknown amount of time (usually between 10 and 15 minutes). This experiment was testing one thing; would the promise of a greater reward make the children go against temptation or would they take the short-term gain for a long-term loss?

Now instead of a marshmallow, think of $10,000 sitting in front of you, ripe for the taking. For a 25-year-old, this may be all of your superannuation. As with most things in life, it may be too good to be true and if you leave it alone, history tells us that the magic of compounding and investment markets can provide you more than double this original amount or $22,887.

It doesn’t take a 6-year-old from the Stanford Marshmallow experiment to understand that $20,000 is better than $10,000. When explained like this, the option to access your super early and effectively lose this additional money sounds like a ridiculous suggestion which no one in their right mind would take.

However, it is expected that 1.5 million people will access their super through the new early access rules proposed by the Government. Each one of them will draw up to $10,000 from their superannuation before June 30, eating their one marshmallow.

The Government is also allowing another payment to be placed on the table giving you the option of drawing a second $10,000, if you so choose, between 30 June 2020 and 24 September 2020. However, the health of your super fund may only get worse if you decide to take this second payment, making your total withdrawal $20,000 over this and next financial year. To put this into perspective, if you are 45-year-old retiring at age 65 this $20,000 withdrawal could impact your final superannuation balance by up to  $30,322.

Don’t get me wrong, I get it. Current events have put you on the floor, your work hours have reduced and cash flow for living expenses is a bit tight. A seemingly “free” injection of funds might just be what the doctor ordered. But let’s consider for a short moment that after withdrawing the allowable amount things go from bad to worse, instead of dealing only with financial troubles you are (hypothetically) now also faced with an uncertain medical condition.

Luckily, you know you have insurance which is available to provide for you and your family while you recover, it might even solve your cash flow problems and your short-term financial hardship at the same time. Unfortunately, the only insurance you and many other Australians have is held inside your superfund, with your nest egg paying the cost of these insurance premiums while also growing for your retirement.

This has created a problem. Your previous idea of accessing your super early to fund short-term expenses has left your super account balance depleted without enough funds to pay for the insurance, leaving you with nothing. This may seem like an unlikely scenario, but it is all too much of a possibility for many Australians. If this happens to you, you will immediately understand the title of this article and the impacts of a short term gain for long term pain.

Regardless of this possibility, thousands of people will still apply online for early release of super.

Maybe they are a sole trader and they need the money to keep their business working, or maybe they are going to access a smaller level of funds which are below the maximum yearly amount of $10,000. Before caving into the temptation of reaching for that low hanging fruit which might instead be the grenade for your retirement plans, you have to remember that there are other options available that don’t put your future at risk.

These could be income support payments such as the crisis payment or a temporary fortnightly $550 Coronavirus supplement. You may also be eligible for the household support payments which are two lump-sum payments of $750. You also cannot forget about the increasingly popular Job Keeper Payment of $1,500 a fortnight for 6 months. This payment may be available to your employer to enable them to keep paying you an income if your hours have been cut. There are also some non-government assistance options available as well.

Some people will consider taking advantage of the superannuation scheme to finally rid themselves of any current high interest bank loans such as credit cards or personal debt. However, before doing so they should consider whether their bank offers a home loan or credit card repayment freeze.

Additionally, landlords and utility providers have increased their flexibility to help people deal with bills and rent payments. These are made to ease the pressure while we all navigate this crazy time and are all worthwhile options to consider exploring before touching your golden nest egg. You should contact your specific providers for further information.

Finally, it is worth talking about the somewhat dry topic of investment markets?

The high level of uncertainty has pushed investment prices down which include the investments in your superannuation. Withdrawing money from your super now may require investments to be sold at discounted prices. This can be up to a 25% discount compared to the previous year’s high. Therefore exploring other options while the market recovers may limit the amount of investment losses that your superannuation suffers.

No one questions that we are living in uncertain times and that the world is changing rapidly on a day to day basis. However, everything is uncertain until it becomes history. Looking back into history the world has faced some troubling times and it is possible that having the option to withdraw some superannuation may have fixed some of these problems. But before you jump in, it is worth doing your research to understand the long term impacts on your retirement and the alternatives which are available to you.

For more information

If you have any questions regarding the early release of superannuation or require further information, contact your local RSM adviser today.

This page has been prepared by RSM Financial Services Australia Pty Ltd ABN 22 009 176 354, AFS Licence No. 238282.

As everyone's circumstances are different and this article doesn't take into account your personal situation, it is important that you consider the above in light of your financial situation, needs and objectives, and seek financial advice before implementing a strategy.    
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