Using super to ease financial pain

Clients who are feeling the effect of the economic downturn may understandably look at their superannuation balance as a way of getting of financial trouble. Those approaching retirement may see early access to super savings as a way of helping a child who has lost their job or is struggling with debt.

Many advisers will have already found themselves in the situation of trying to explain to clients why they cannot now take back those extra contributions they made while times were good, or why it’s not a good idea to access super early — not least because of the tax impact.

However, it is true that some people may well be able to access at least part of their superannuation balance, according to their circumstances.

While the regulators continue to clamp down on schemes that promise early release of super, there have also been changes to the superannuation system that give those in particular circumstances — such as permanent incapacity, a terminal medical condition, or severe financial hardship — the ability to access their superannuation savings.

However, this will not help those who are struggling with mortgage repayments or school fees, as these circumstances by themselves do not meet the Australian Securities and Investments Commission’s (ASIC’s) criteria of financial hardship for early release. For example, to qualify for ‘severe financial hardship’, a person must have been receiving Government income support for 26 weeks and prove they cannot meet “reasonable and immediate family living expenses” with this Government support.

Similarly, ‘compassionate grounds’ are strictly defined by law so that superannuation funds can only be accessed for purposes such as medical treatment not readily available through the public health system, life-threatening illness or injury, acute or chronic physical pain and mental conditions, or to prevent foreclosure by a mortgagee.

The accompanying table shows that the percentage of applications for early release of superannuation on compassionate grounds that were approved was slowly but steadily increasing up until last year, when it dropped significantly. While more people applied, possibly because of the impact of the financial crisis, they clearly did not meet the criteria, as fewer approvals were given on a percentage basis.

Generally, to apply for early release of their superannuation, members must apply through their superannuation fund, detailing the grounds on which they are applying, and then submit this to the fund. If the fund deems it appropriate, they will release the funds. However, if applying on compassionate grounds, the application goes directly to the Australian Prudential Regulation Authority (APRA).

For those who don’t meet the necessary criteria for early release, there may be other options available.

There are three categories of fund accumulation within a superannuation fund: unrestricted non-preserved; restricted non-preserved; and preserved benefits.

For most people, the bulk, if not all, of their funds are in a preserved category, which generally means that funds are locked away until they reach preservation age. All contributions made after July 1, 1999, are preserved benefits.

However, some fund members — particularly older fund members who were paying money into superannuation before compulsory contributions were legislated in 1992 — may have unrestricted non-preserved benefits in their fund, which can be accessed at any time.

The third category, restricted non-preserved benefits, requires a termination of employment in order to be accessed. This does not necessarily mean the fund member is going to retire; they could simply be changing jobs or the type of work they do. It is enough to be leaving the current employer.

While accessing non-preserved superannuation funds may now seem attractive to people in the current economic conditions, they should be made aware of a number of issues before taking money out of super.

Clearly, there is the important fact that they will have less money available to them when they retire, including the lost effect of compounding interest.

In addition, the tax implications should be taken into account. The tax payable will depend mainly on the person’s age. Anyone under 55 will pay income tax (at their marginal rate) on any amount withdrawn as a pension, regardless of whether it is from a restricted or non-restricted category of benefit. If the funds are taken as a lump sum, they are taxed at 20 per cent.

Those aged between 55 and 60 can withdraw a lump sum of up to $140,000 tax free, with 15 per cent tax payable on the balance. For pension payments, they will receive a 15 per cent tax rebate.

Those over age 60 pay no tax on either pension payments or lump sums.

Any funds accessed through the early release option will also be liable to tax. The rules of the fund also need to be checked as superannuation funds may apply exit fees to any funds released in this way.

Michael Hutton is wealth management partner for HLB Mann Judd Sydney.