The difficult decision to access super early: What to consider, how to do it

When times get tough, it’s natural to cast around for any source of extra cash. And because many Aussie workers in their 50s often have a healthy amount of money sitting in their superannuation fund, super might be an obvious place to look.

After all, the mean super balance for a man aged 55-59 is more than $237,000, while a woman the same age has almost $124,000, which are tempting sums if your budget is tight and you’re some years away from the Age Pension eligibility age of 65.5 years and rising.

But accessing your super early isn’t easy to do and shouldn’t be undertaken without serious thought. As Tim Howard, a technical adviser at BT Financial Group, says there are limitations in place so “you can’t just decide one day that, ‘I’m not working any more so I’m going to start drawing a pension or taking a lump sum out of my super’”.

Not least because in an ideal situation, your super should remain invested as long as possible for maximum growth, so it can provide you with a meaningful income in retirement, Howard adds. In fact, the law doesn’t allow most people to access their super until they hit what’s known as their preservation age, which ranges from 55 to 60, depending on the year you were born.

There are, however, limited circumstances in which you can access your super ahead of your preservation age, which are helpful to be aware of should you find yourself in need. (Before making an application, it’s important to check that your own super fund permits early release of funds.)

You have compassionate grounds

• If you or a dependent need to cover the cost of medical treatment that’s not “readily available” through Medicare for a life-threatening illness or injury, acute or chronic pain or acute or chronic mental illness. Super can also be withdrawn to cover the cost of medical transport to treatment for one of these conditions.
• You or a dependent need to cover the costs of accommodating a severe disability by modifying your home or vehicle or buying a modified vehicle or disability aids. Super can only be used to pay for changes to your home if it’s your principal place of residence. For rental properties, your landlord must provide written consent to the modifications, and for vehicles, you must own or have joint ownership of any vehicle you wish to modify.
• You or a dependent need to cover the cost of palliative care. If you have a terminal illness and need to pay to stay in a hospice or use palliative care service providers or care, you can apply direct to your super fund for early release and the money won’t be taxed.
• You need to cover the cost of a funeral, burial or other death-related expenses for a dependent.
• You need to pay mortgage arrears to prevent your home being repossessed or sold by your lender, or to pay council rates arrears to prevent the local authority from taking possession of or selling your home. Applications can only be made if the home is your principle residence and you have evidence that you’re legally responsible for the mortgage payments, and there’s a limit to the amount you can have released in any 12-month period.

Applications on all compassionate grounds – other than in the case of requiring palliative care for yourself – must be submitted to the Australian Taxation Office (ATO), which you can do online, and will take up to 14 days to process. The ATO has a strict definition of what constitutes a dependent, as well as on the type of evidence required to support an application, which it’s advisable to explore before applying so you put your best possible case forward.

You’re suffering severe financial hardship

You can apply direct to your super fund for permission to withdraw up to $10,000 from your super because you’re suffering severe financial hardship, such as not being able to meet “reasonable and immediate family living expenses”. To qualify, however, you need to have received Centrelink income support payments for 26 weeks’ straight, and you can only make one such withdrawal in any 12-month period.

The Department of Human Services has more information about super and severe financial hardship release conditions.

You have a terminal medical condition

As well as being able to access super early to pay for palliative care, you can ask your super fund to release your savings as a lump sum if you have a terminal medical condition. Again, the conditions are strict and the money must be withdrawn within a certain period or it will become subject to tax. You can make such an application through the ATO’s online service, which will forward your request to your super fund.

You’ve been temporarily or permanently incapacitated

You can apply direct to your super fund for the release of money if you have a physical or mental condition that temporarily prevents you from working, reduces the hours you can work, or is likely to prevent you working again in your specific field of expertise.

If your application on temporary incapacity is granted, you’ll receive money from your super in the form of regular payments, but in the case of permanent incapacity, your super fund may approve what’s called a ‘disability super benefit’ that comes as a lump sum or regular payments. As with all such applications, there are detailed conditions on the type of evidence you must supply for an application to be successful and for you to receive concessional tax treatment on your payout.

Outside the tax issues we’ve mentioned, there are different tax treatments applied to some forms of early release that are important to take into account because they may reduce your remaining superannuation balance.

The ATO also warns against using any private scheme that claims to help you get access to your super ahead of your preservation age. Scheme promoters may promise to submit applications on any of the grounds above on your behalf or offer to help move money from your existing fund to a self-managed super fund so you can access it early, but these schemes are illegal and could see you end up paying substantial financial penalties. At a minimum, you could lose the money in your super account and put yourself at risk of identity theft, the ATO cautions.

Overall, BT’s Howard advises anyone who hopes to access their super ahead of their preservation age to think carefully about their future plans before doing so.

“In many cases, you don’t necessarily want to pull all of your super out and spend it in one go if it can be avoided in because if you do, you’re left with the question of how you’re going to fund your retirement income going forward,” he says.

Did you access your super early? Was it the right decision for you?

Things you should know

Superannuation is a long-term investment. The government has placed restrictions on when you can access your preserved benefits. The Government has set caps on the amount of money you can add to superannuation each year on a concessionally taxed basis. In addition, the Government has set a non-concessional contributions cap. For more detail, speak with a financial adviser or visit the ATO website.

BT Financial Advisers are representatives of © Westpac Banking Corporation ABN 33 007 457 141 AFSL and Australian Credit Licence 233714 (Westpac). BT Financial Advice is a division of Westpac. The information in this publication is general information and factual only. It does not constitute any recommendation or financial product advice. The information has been prepared without taking into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it.