There is not a week that goes by in which I’m not asked about how to access superannuation to repay debts. In fact, a lot of banks and debt collectors will actively encourage people to access their superannuation. It might seem like a great option. Get some money out to pay down your debts; it’s your “savings” anyway. But early withdrawal of superannuation is a horrifically bad idea for a number of reasons:
- Superannuation money is protected from creditors in bankruptcy. If you withdraw that money, it’s now available for creditors. I routinely see people who’ve accessed their super and filed for bankruptcy a year or two later. That money would have been safe had they not touched it.
- You lose the tax protection of superannuation. Generally, if you withdraw your super, you’re going to pay 31.5% tax on it. So not only was that money safe from creditors, but one third of it just evaporated into taxes.
- It doesn’t fix the problem. Most people are in trouble because their expenses are greater than their income. An injection of cash doesn’t fix this. The super is eaten up by interest, fees, etc., and two years later you’re in the same position, only now you would have less retirement savings.
- Big mortgages are not made smaller by paying off arrears. If you’re struggling with a big mortgage, the hard truth is that you’d be better off selling and either buying something smaller or renting. Renting is a great option for many people, especially if you’re on a low income and qualify for rent assistance.
The only time you should access your super early is if you have a terminal illness and you’re going on a massive holiday. Otherwise, the money should stay there, safe and protected from your creditors and the tax man. In fact, most people should make extra voluntary contributions to their super, even if you have debt. The tax benefits make it attractive, and it’s a good idea to squirrel money safely away into your own long-term savings.