Hatching your nest egg early

Written on the 2 March 2020 by Arrow

The summer bushfires have touched the lives of all Australians. For individuals who lost homes, businesses or livelihoods, the financial hardship lingers, prompting many to ask whether they can dip into their super to tide them over.

The short answer is generally no. According to the Australian Taxation Office (ATO), there are very limited circumstances where you can access your super early, mostly related to specific medical conditions or severe financial hardship.

Before we discuss these special circumstances, let's look at when you can legally access your super under normal conditions.

Accessing super before age 60
Under superannuation law, there are strict rules around when you can start withdrawing your super.

The first hurdle is reaching what is referred to as your preservation age. Once you reach your preservation age between age 55 and 60 depending on the year you were born and retire, you can access your super in a lump sum or as a pension. But as a disincentive to early retirement, there may be tax to pay.

Even if you keep working, once you reach preservation age you can access a portion of your super by starting a transition to retirement pension. This can be an effective way to scale back your working hours while supplementing your reduced wages with income from super.

However, you can only access 10 per cent of your pension account each year. You pay tax on the taxable portion of pension income at your marginal rate less a 15 per cent offset. Earnings on assets supporting your pension are taxed at the normal super rate of 15 per cent.

Accessing super from age 60
From age 60, you can access your super tax free provided you are no longer working. And once you turn 65 you can access your super tax free even if you haven't retired.

Anyone who has suffered financial hardship as a result of the bushfires and has already reached their preservation age could dip into their super under the normal rules, provided they retire or start a transition to retirement pension.

But what about people who don't qualify under the normal rules? That's where the early access rules governing severe financial hardship or compassionate grounds come in.

Severe financial hardship
There's no question the recent bushfires have caused severe financial hardship for many people in the community. But for superannuation purposes, the definition of hardship will mean few people can use it to gain early access to their super.

You can gain access to at least part of your super as a lump sum if:

You have been receiving certain government income support payments continuously for at least 26 weeks, and

You are unable to meet your reasonable and immediate family living expenses.
Even then, you can only receive a maximum payment of $10,000 a year before tax.

If you have reached your preservation age plus 39 weeks, you may be able to access your entire super balance as a lump sum or pension (as opposed to 10 per cent of your balance each year with a transition to retirement pension) if:

You are employed for less than 10 hours a week, and

You have received government income support payments for at least 39 weeks since reaching preservation age.
Access on compassionate grounds
You may be able to take some money out of super early on compassionate grounds but, once again, strict rules apply. The money can only be taken as a lump sum and used to cover unpaid expenses including:

Medical treatment or transport for you or one of your dependents, but only for a chronic or life-threatening illness not available through the public health system,
Modifications to your home or vehicle to accommodate a severe disability,

To prevent foreclosure on your mortgage if your lender threatens to repossess or sell your home.

Unfortunately, the rules governing early access make it extremely difficult to qualify. That's because super is meant to be used for the sole purpose of providing retirement income.

If you would like to discuss when and how you can access your super, under the normal rules or due to special circumstances, please give us a call.