How dipping into your superannuation during the COVID-19 crisis could lose you money

Australians could cop major losses by dipping into their superannuation to make it through challenging conditions caused by the coronavirus pandemic, superannuation experts warn.

Under the new scheme introduced in the Morrison government’s $66 billion stimulus package, those whose income have fallen by at least 20 per cent due to the impacts of COVID-19 will be allowed to withdraw a maximum of $10,000 from their nest eggs before the start of the next financial year on July 1. They will also be able to apply to take out another payment of up to $10,000 between July and September.

The withdrawals will be tax-free and will not affect an individual’s welfare payments.

Superannuation research house SuperRatings chairman Jeff Bresnahan labelled it a “lose-lose” scenario and said for those applying to withdraw from their nest egg, some may receive as little as 70 cents for every dollar they would have received two months ago.

“Opening the floodgates to allow virtually anyone and everyone to drag up to $20,000 out of their super fund, with the current market volatility, is not the answer,” he said.

Taking $20,000 out of someone the age of 25 now could mean missing out on potentially more than $130,000 when they retire, while the withdrawal from a 35-years-old’s super account could forego some $80,000 in future benefits, according to a SuperRatings analysis.

Source: SuperRatings. Assumptions: based on ASIC’s MoneySmart calculator using a Growth option with an assumed investment return of 5.0% before fees and taxes on earnings.

What could you do if you’re in financial hardship?

Chief executive of Industry Super Australia Bernie Dean said Australians who are suffering financially should consider all other forms of government economic support before accessing their superannuation early, a measure which should be used “only as a last resort”.

“Some members will have lost their jobs or had their hours dramatically reduced and Industry SuperFunds will do all they can to help them,” Mr Dean said.

“But members should tread carefully and only think about cracking open their super after they’ve taken up the extra cash support on offer from the government – super should be the last resort given the impact it can have on your retirement nest egg.

“Members need to know that taking your super now is like selling a house at the bottom of the market – you’ll lose money you would probably claw back overtime.”

FairVine Super’s head of customer experience Rachel Hamlen agreed that individuals should think twice about dipping into their nest eggs, as draining it unnecessarily may cause you serious financial hardship in the future.

“If you do need to access the payment, consider taking only what you’ll need to get by, and also reinvesting money you don’t end up using back into your super,” she said.

How has the coronavirus affected our superannuation?

COVID-19 and the uncertainty around the extent of its impacts has driven investors across Australia and the world to sell in the share and property markets.

This has seen the median growth fund decline by 3.1 per cent in February and by another 10.5 per cent in the first half of March, according to the latest figures from Chant West.

Growth funds are where most Australians have their superannuation invested.

But Chant West’s senior investment research manager Mano Mohankumar said the figures are fluctuating everyday due to volatility in the markets.

Mr Mohankumar said the 27 per cent drop in Australian and international shares since the end of January has hit the performance of super funds.

But the loss of the median growth fund has been limited to about 13 per cent, thanks to diversification, which is a strategy that spreads investments in a portfolio across a mix of growth and defensive asset sectors.

“This is still a material reduction in account balances, but it comes on the back of the tremendous run funds have had since the end of the global financial crisis (GFC),” he said.

He noted that the median growth fund recorded average increases of 9.3 per cent a year between the GFC low point in early 2009 to the end of January 2020. The typical long-term return objective of a growth fund is 5.5 per cent to 6 per cent per annum.

Market to bounce back sooner or later

Mr Mohankumar advised against making panic decisions, such as withdrawing from nest eggs or switching super funds, and said it was “very risky” to try to time markets at this stage.

“The negative returns we’ve seen in recent weeks are ‘unrealised’ losses, so you don’t actually lock them in unless you take your money out or switch to a lower risk option,” he said.

“If you do that, then not only do you turn those paper losses into real ones, but you also miss out on the market rebound which will come sooner or later.”

He added that it was also common for older superannuation holders to leave their super untouched in the fund when they retire.

“We encourage everyone to remember that superannuation is indeed a long-term investment, and if the investment option you are in suited you two months ago, then it is most likely the one to stick with now.”

However, if you don’t already know, it could be worthwhile to find out how much your super provider is charging you in fees. A super fund demanding high fees may not be a good idea in times of economic turmoil, when many funds are returning losses.

If the fees are higher than what you are comfortable with, consider using RateCity’s comparison tool to look at what your superannuation options are.

In the end, it can be a good move to speak to a financial adviser who will consider your personal situation before making any decisions relating to your superannuation.

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