Early withdrawals from superannuation are a bad idea for retirement savings

Young people dream of using super for a home deposit, but fortunately they can't.

Young people dream of using super for a home deposit, but fortunately they can't. Photo: TND

The cost-of-living crisis is driving a desire for Australians to raid their superannuation accounts to pay everyday costs, but fortunately for their long-term futures, that is not an option for most people.

Research group Finder found that 56 per cent of Australians, the equivalent of 11.3 million people, would raid their super kitty if they were allowed.

As the table below shows, much of the spending people fancy making from early super release would be to cover short-term cost-of-living expenses and consumer ambitions.

Finder found that 69 per cent of Millennials (1982-1994) and 65 per cent of Gen Z (1995-2010) would avail themselves of early withdrawal compared to just 47 per cent of Gen X (1965-1981).

But even if you could get hold of your super money early, there is a significant cost to your retirement in doing so.

Data from the Association of Superannuation Funds of Australia produced in 2022 estimated that withdrawing $10,000 from your super at the age of 30 could cost you more than double that in retirement – a possible loss of $21,516.

We actually know what happens if you withdraw your super early because a lot of people did that during the COVID-19 pandemic, when the government allowed anyone facing really hard times to take out up to $20,000.

That resulted in 3.46 million people taking $36 billion out of super.

While some of that money went into necessary spending, surveys found that a significant amount went into gambling.

And Treasury’s Retirement Income Review back in 2020 found that the cost to retirement balances of 30-year-olds on average salaries could be as much as $69,300 if they took the whole $20,000 from their super.

So be careful what you wish for – if you do get to take out money early you will pay big time in later years.

Wayne Leggett, principal at Paramount Financial Solutions, warns against taking money out of super.

“The general advice is don’t touch it until you need it because there are limits on how much you can put in, and for the vast majority of people it is the most tax-effective way you can save.”

When can I take out my super?

There are circumstances when you can take out your super early.

The first of these relates to hardship or compassionate circumstances.

For example, if you or a dependent are diagnosed with a terminal illness your super can be withdrawn to help pay for medical care, funeral costs or alterations to your home to cater for disability.

You can also access super in the case of severe financial hardship that can be caused by long-term unemployment and temporary or permanent disability.

Remember, if you take out super under these circumstances there could be tax on parts of what you withdraw.

A financial adviser or the ATO will be able to help you determine the amount.

First-home buyers release

If you’ve never owned a home you can save up to $15,000 a year through super to a maximum of $50,000 and use that to help fund a home purchase.

Remember, if you make concessional contributions the government will tax those at 15 per cent so you will only get back 85 per cent of what you put in.

The advantage of saving this way is that both the money you put aside and the earnings on it are taxed far lower than they would be outside super. When you take the money out, you can take both the amount you have saved plus the earnings it has accrued while in super.

Preservation age

This is the age at which you can take your super if you’ve retired or begin a transition to retirement pension if you are still working.

It is not the same as the age you can receive the age pension.

The preservation age has increased over the years with the increase in the pension age and the desire of the government to help fund an ageing population.

You can’t take a tax-free super pension just because you reach preservation age – you have to show the trustees of your super fund that you have actually retired.

Transition to retirement

However, if you have reached preservation age and continue working, you can begin a transition to retirement (TTR) pension, which must be between 4 and 10 per cent of your super balance.

If you are over 60 these are tax free and if under 60 then the taxable portion of the pension is taxed at your marginal rate, with a 15 per cent discount.

You can still make super contributions while receiving a TTR so you can spend some super and replace it.

Because of the tax arrangements you pay less tax in that situation.


Once you hit 65 you can take money out of super, regardless of whether you are working.

Even then, think twice before spending your super because it still grows through investment returns even if you aren’t contributing.

“If you have a mortgage it might be advisable to draw on your super pension and to make the mortgage repayments rather than paying down the mortgage with a lump sum withdrawal,” Leggett said.

“It depends on your personal situation and whether you can sleep at night.

“If you think mortgage rates have peaked, it’s not likely that your super will underperform the home mortgage rate.”

Home Equity Access Scheme

This is a reverse mortgage scheme where the government will pay you a fortnightly amount equal to 150 per cent of the age or other relevant pension up to a set amount.

You can also get a lump sum and the interest cost is only 3.95 per cent compared to 7 per cent from a bank, so that could be a useful financial boost in retirement.

The New Daily is owned by Industry Super Holdings

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