Why early access to super should be a last resort
If you meet the strict criteria to draw on funds meant for retirement, make sure you understand the long-term consequences too.
The superannuation system is based on the principle of putting money aside until retirement and it’s common knowledge that there are very few circumstances under which people can access funds early.
However, for those who do successfully apply for some or all of their superannuation to be released, it’s important to understand the potential implications of that decision.
The ATO outlines the limited circumstances in which superannuation can be accessed early, including severe financial hardship, a terminal medical condition or for compassionate reasons, such as for weight-loss surgery, psychiatric treatment, dental procedures or IVF, for example.
Figures from the ATO show there were over 56,000 applications to access superannuation on compassionate grounds in the FY21-22. More than 34,000 applications were approved, pulling $573 million out of the system.
While the overall trend over the past four years is an increase in the number of applications to access superannuation on compassionate grounds, it’s important to highlight that applicants must meet specific criteria.
One of these criteria is that the medical treatment is either for you or a dependant, for a life-threatening illness or injury, or to alleviate acute or chronic pain, or to alleviate acute or chronic mental illness. Documentation must be provided, including two medical reports from registered specialists proving the criteria are met.
Home or vehicle modifications to accommodate special needs arising from you or your dependant’s severe disability can also qualify.
It’s from here that I would urge superannuants to consider the longer-term implications of accessing their super balances early.
While evidence of medical conditions or injury are required, it’s important to consider the potential impact on any insurance policies held, such as life insurance.
Are the conditions specified covered by your policy? Have they been previously disclosed to your insurance company? Do they need to be, and will your current premium be impacted? Will such conditions impact your ability to be covered by insurance in the future?
People also need to consider that any monies paid out will be treated as income for that financial year, which will increase the total amount of income earned, potentially pushing some people into a higher tax bracket and result in tax owing.
And while it might be obvious, a simple consequence of withdrawing super early is potentially having a smaller balance at retirement. Your balance will decrease by the amount withdrawn initially, but also by any potential income or gains that sum could have earned over the remaining years until your retirement.
The ATO rightly warns people against illegal schemes to access your super early.
However, I believe people also need to be educated about the unintended, but still important, consequences of withdrawing funds before retirement. People need to be fully informed of all potential consequences, however unintended they may be, and continue to treat early access to super as a last resort.
Naz Randeria is the managing director of Reliance Auditing Services.
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