Should you withdraw your super to pay off debt?

Many Australians are stressed about debt – and if that’s you, you may have considered many different options for paying down your debts, including the possibility of withdrawing funds from your super.

There are limited circumstances in which you can access your super early, depending on eligibility and whether your super fund will allow it. The most important thing is to get professional advice from a financial expert, such as a financial adviser, or your accountant.

Here are some important points to be aware of, so you can be armed with some questions when you speak to an expert.

Withdrawing your super to pay debt: some things you need to know

Withdrawing your super as a lump sum is not quite as easy as taking money out of your fund as you would a savings account. There’s a bit more to it and a few things you need to consider.

Normally, you can only access your super when you reach what’s known as ‘preservation age’ and retirement, which is currently 65. But there are some cases where you may be eligible for taking super out early.

Withdraw super to pay debt

If you’ve reached your preservation age plus 39 weeks and you weren’t employed when you applied to withdraw super, there are no restrictions on how much you can take out.

If you haven’t reached preservation age, there are a number of requirements to withdraw your super early, including:

  • You are in severe financial hardship, unable to pay for essential family living costs (and have been getting eligible income support payments for 26 consecutive weeks).
  • You have a terminal illness.
  • You have permanent or temporary incapacity.
  • You meet compassionate grounds.

You can request to take out a minimum of $1000, or a maximum of $10,000 – and you can only make a withdrawal once in any 12-month period.

You may also be eligible to pull out a portion of your super for the First Home Super Saver Scheme (FHSS), which allows you to save money inside your super fund to buy your first property.

Other considerations

If your super fund agrees that you can withdraw super early and you’re eligible to do so, it’s important to understand the implications of taking $10,000 out of your super early.

Firstly, your super grows due to what’s called compound interest. This means you’re earning interest on interest. So $10,000 taken out early may well have grown to nearly $16,000 in ten years’ time, according to a compound interest calculator like this one from Moneysmart. Remember, figures are always just a guide and you must get proper financial advice from a professional.

So taking out that $10,000 now can potentially make a significant dent in your retirement nest egg.

You may also find there are tax implications on that withdrawal.

Some options for dealing with debt

There are many strategies that can be considered in order to reduce debt, such as consolidating credit card balances onto a zero-interest credit card to give you time to whittle away at the balance, or even a repayment plan on debt could be another option that you consider. Asking for reductions in interest rates could also work.

Talking to a financial counsellor who can help assess your situation and current circumstances may also be a good idea.

Tips on improving money management and avoiding future debt

It’s the million-dollar question (pardon the pun): how to become better at managing the money you do have? And what can you do to avoid getting into debt in the first place? Better financial literacy is key, according to findings from our Choosi Digital Financial Trends Report 2021.

So how can you do that? Whitely Bradford, Associate Lecturer at Griffith University and an expert in financial literacy, says we can all increase our knowledge around how we manage our money as well as how we behave with money.

“We’re creatures of habit, and in order to improve our financial situation, we need to break the bad habits we’ve become accustomed to, and create new ones,“ she explains.

Here are her top 3 tips:

1. Set up direct debits

“If you have direct debits in place to trigger on the day you’re paid, that can be a useful way to set yourself up by paying your bills and saving automatically. It reduces the temptation for you to spend money on other things.”

2. Create accounts with goals and purposes

“Label your savings accounts, or offset accounts, with specific goals, such as ‘holiday’ or ‘wedding’,” says Bradford. “Similarly, having accounts for purposes, such as an emergency fund, bills, or home expenses is a really effective way of changing your behaviour as you assign emotional attachment to the goal or purpose and it helps you stay committed and accountable to yourself.”

3. Get into the habit of delaying purchases

“When I’m considering a large purchase (say, over $100, but ‘large’ will be different for everyone) I tell myself that I’ll sleep on it. This helps me differentiate between a purchase that I need, versus something that I want.”

Remember: your super is designed to fund your retirement

Many financial experts say it’s best to work out ways to manage your debt and whittle it down without dipping into your retirement nest egg. After all, your super is there to support you in retirement, and there may be implications in using it to pay down debts.

We hope this has given you some ideas on creating better money management habits in general.

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The above article is information only and is not intended to be advice. Always speak to a registered financial expert who can give you advice tailored to your individual circumstances.