From 1st July people who are unemployed, have been retrenched or had their hours cut by at least 20 per cent can draw another $10,000 out of their super fund, which is part of the financial relief program for people seriously affected by the Covid virus situation.
Many people who have drawn money out have done so justifiably, due to severe financial pressure. I have also been told of others who have drawn money out to buy a new car, to pay off debts including credit cards, and for a first home deposit.
Clearly some younger people think they have far more important financial needs to deal with than retirement saving and they see super as unimportant. It also shows that if there were no compulsory super scheme some people would save very little for their retirement.
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Is it sensible to draw money out to buy a new car? Based on reasonable assumptions a 30-year-old earning $60,000 per annum who has $40,000 in super now should have almost $2 million at age 65.
However if they withdraw $10,000 now and don't replace it they will have less than $1,850,000. So $10,000 drawn now means a $150,000 loss at retirement. That's 7.5 per cent less, and so a 7.5 per cent cut in retirement income. Is it worth losing that to get a new car now? No.
What about drawing super to pay off debts? This strategy is also very doubtful. Credit card interest rates are higher than super will earn but this approach will only work if, once paid off, the cards are cut up, nothing more is spent on them, and the former payments are paid as extra contributions to super.
The people who I was told had drawn super to pay off debts did not plan to do that. It seems unlikely that many people would. Drawing from super to pay off debts with lower interest costs than super fund earnings, such as home loans, makes no sense.
For a young person drawing $10,000 from their super towards a first home deposit certainly sounds appealing. It is extremely difficult to save a deposit while also paying rent. While drawing from super for this purpose is against the rules of the scheme at least the money is being used for a positive purpose. The home purchased should appreciate in value over time and a more secure family situation should be established, possibly leading to other financial progress.
There are very few scenarios that would justify drawing from super except severe financial stress.
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