One of the federal government's more controversial moves in tackling the coronavirus pandemic and the damage it is wreaking on our economy has been to allow early access to superannuation.
For those who qualify, the government allowed withdrawal of up to $10,000 from superannuation accounts in the 2020 financial year. Up to another $10,000 is available in FY21. As FY20 ended on 30 June, eligibility for the first tranche of the scheme has now ended.
Eligibility for withdrawals under the second tranche was due to expire on 31 October 2020. But according to reporting in the Australian Financial Review (AFR), today the government has announced that this deadline will be extended by 3 months to 31 December 2020.
The $10,000 cap will remain, which means that if anyone has already withdrawn up to $10,000 in FY21, no further withdrawals are permitted.
The AFR quotes a spokesperson from the Treasury, who stated:
The government is extending the application period for the measure… to increase the scope for individuals who may still be financially impacted by coronavirus to access early release in the coming months. While superannuation helps people save for retirement, the government recognises that for those significantly financially affected by the coronavirus, accessing some of their superannuation today may outweigh the benefits of maintaining those savings until retirement.
Should you withdraw your superannuation early?
I've been on the record before on this issue, and my views have not changed. I do accept that withdrawing funds from superannuation might be necessary for those who may have been severely affected financially from this crisis. Unemployment is at record highs. This might be the only viable pathway left for some individuals or families to avoid acute hardship, despite the other avenues of assistance the government is providing in response.
However, I maintain that withdrawing cash from a superannuation fund should be the absolute last resort for anyone. Super is designed to provide all Australians with a safety net in retirement. Under the super system, your regular contributions are typically invested in growth assets like ASX shares.
Harnessing the miracle of compound interest, this should result in a sizeable nest egg for most workers over a working lifetime. This system is not perfect, but it does work reasonably well in my view. Especially if you consider the generous tax implications of using super.
However, compound interest works best when you simply leave it to 'do its thing'. By withdrawing a sizeable chunk of cash from your super fund, you are kneecapping this process. This could result in losing multiples of the withdrawn amount had you left it alone.
The AFR quotes modelling that warns, "a 30-year-old worker would be $97,214 worse off in retirement if they took out the full $20,000 permitted across the two financial years."
I have heard many unsubstantiated reports of people withdrawing super for what could be deemed frivolous means, such as buying a new car, new furniture or even gambling it. Is another $100,000 for your retirement really worth doing something like that?
Foolish takeaway
I pass no judgement on anyone who takes advantage of the early super scheme to save themselves or their family from financial hardship. However, this announcement from the government does concern me. I do think there are significant cases where individuals are withdrawing their super money unnecessarily.
So if you're considering taking the government up on its offer – think twice. Leaving your super alone might just be the best investment decision you ever make.
