Withdrawing super to pay debt: What you should know

We’ve used official government sources and the expertise of our professional team of Financial Hardship Advocates to offer the below guidance on super and what to consider before accessing your super early for any reason, including paying off your debt.

 There is a lot of misinformation online about super and how to access it before retirement.

Always consult trusted experts and reliable sources when making decisions about your super.

The information provided here is not financial advice. We recommend you speak with our team, a financial counsellor or local community legal centre to find out what options might be available.

Get help to overcome your debt today.

What is super or superannuation?

This is an important question to answer before we start discussing using your superannuation to pay off debts or for any other reason.

According to MoneySmartSuper is a way of saving for retirement. Your employer must pay a percentage of your earnings into your super account, and your super fund invests the money until you retire.”

So, super is a government initiative for you to save money for your retirement. Your employer is legally required to pay a part of your earnings to a super fund you have nominated.

We encourage you to consider carefully before pulling funds for any other reason than saving for your retirement.

Can I use my super to pay off debt?

In general, you can at times access your super if you are considered to be in hardship and struggle to pay essential costs or due to medical reasons. However, this will also depend on the policy you have with your super provider and your specific circumstance.

You might also be considered for early access to your super if you were a temporary resident working in Australia and you have left Australia.

As this is a complicated matter with huge potential repercussions to your retirement, we suggest using your super to pay off debt (or for any other legal reason) is used as a last resort. Consult a reliable expert such as a financial planner or lawyer before making your final choice.

Many scammers are targeting Australians trying to offer schemes for early access to super – these schemes are illegal and heavy penalties apply. Always ensure the person advising you has the right credentials and your best interest at heart.

How is my super changing?

You might have seen that in July 2021, the super guarantee rate rose from 9.5% to 10%. This means your employer should have increased your super by this rate. The super you will receive is scheduled to progressively increase to 12% by July 2025. You can find more on this on ATO’s website.

Regulations and rules around super continuously change, especially as we’re in the middle of the COVID-19 pandemic. This is why we encourage you to stay on top of the latest government updates on super and always make sure you use credible, trusted sources to find information about superannuation.

Scams around super are on the increase – so do your research and ensure you trust the source and advice before making any big decisions that will impact your retirement funds.

How can Way Forward help me consider if I should access my super to pay off debt?

At Way Forward, we cannot provide financial advice, but we can help manage and reduce your debt without you having to dip into your super.

As a registered charity, we have no financial interest in you accessing your super. In general, we advise against it and offer alternatives where possible. In short, we always try to offer real alternatives to managing your debt that do not impact your savings for your retirement.

We do this by consolidating your debt payments and taking over negotiations with your creditors. The best part is, we’re a completely free service and there are no hidden fees or costs. Our dedicated team of professionals are funded by some of Australia’s leading financial institutions, allowing us to help you find your way forward, faster.

Get help to overcome your debt today.

Should I use super to pay off debt?

This depends on your personal circumstance so you should consult a reliable expert such as a financial planner or lawyer before making the final choice.

If you’re in financial hardship, we strongly recommend exploring alternatives before you dip into your super. See our ‘Emergency help & funding’ page for some of the available free emergency services and funding if you’re in Australia and in financial difficulty.

Using super to pay off debt might seem a lucrative fix to your current circumstance, but it will make a big dent into your retirement savings as you will lose on the cumulative interest for that sum that you’d gather otherwise for decades to come.

What’s the long-term impact for using super for paying off debt?

It’s important to understand how compound interest works to understand the long-term impact of dipping into your super before retirement.

To put simply: for any sum of money sitting on your bank account or super fund, you are earning interest on interest. It means you are ‘earning money’ on your initial sum of money on top of any interest that money has earned.

Let’s use an example from Australian Government’s Superannuation website, to make this even clearer:

“If Sarah had an initial deposit of $1,000 and it compounded at 5%, after one year Sarah would make $50 for doing nothing. Sarah’s total would be $1,050.

If Sarah waited another year, that would jump to $1,102.5.

This might seem a little underwhelming, but here’s what happens to that money when Sarah leaves it compounding for years, or even decades:

Year 5: $1,276.28

Year 10: $1,628.89

Year 25: $3,386.35

Year 50: $11,467.40”

So – say you took $1,000 off your super fund today, you would be losing out on $11,467.40 if you were to retire 50 years later (and that fund was performing at a steady interest rate of 5% for those years).

If that’s the impact on $1,000… imagine what it’d be for taking out $10,000 today! In fact, you don’t have to imagine. Many compound interest calculators exist online where you can calculate how much a sum of money can earn you over time with compound interest. This will help you fully grasp the long-term impact of any early withdrawals of your super.

For example, you can try this compound interest calculator on MoneySmart.

What other considerations are there for accessing my super early?

Beyond compound interest, it’s good to keep in mind that:

1

Super (while in your fund) is protected from bankruptcy and your creditors.

This protection is lost once you withdraw from your fund.

2

Tax is paid for any super withdrawals.

For example, if withdrawing $10,000 (which is the maximum withdrawal per annum) you will end up with approx. $8,000 depending on your circumstance. According to ATO, “There are no special tax rates for a super withdrawal because of severe financial hardship. It is paid and taxed as a normal super lump sum. If you are under 60 years old, this is generally taxed between 17% and 22%. If you are older than 60 years old, you will not be taxed.”

3

You may lose insurance benefits such as income protection or total and permanent disability (TPD) insurance. 

And if you’ve ended up in financial hardship due to loss of income, check your super policy to see if you’re covered by insurance like income protection. Please consult your super fund for more information on your fund and particular situation.

4

Not all super funds allow early withdrawal on the grounds of severe financial hardship or compassionate reasons. 

Please consult your super fund for more information on your fund and particular situation.

5

Your super is safe thanks to The ABA’s Banking Code.

According to The Australian Banking Association’s ‘Banking Code’ that sets standards for customer service across Australia’s banks, banks will not require you to access your superannuation to pay any amount you owe them under a loan (unless you are borrowing for a self-managed superannuation fund). See participating banks and more detail here.

What are the alternatives to using super to pay debt?

There are many alternatives to withdrawing your super if you find yourself unable to pay off your debts.

These include debt consolidation, payment consolidation, asking for moratoriums, renegotiating payments with your creditors, asking for a reduction in interest rates, working up a manageable budget and repayment plan or even waiving parts of your debt for legitimate reasons.

These are all options before considering dipping into your super or considering bankruptcy.

First step is to speak to a trusted expert who can assess your unique situation.

Way Forward offers free debt advice and you can either fill in our online form or give us a call on 1300 045 502. We’ll take the time to understand your situation and if we can’t help, we will direct you to a service that can.

How can Way Forward help?

At Way Forward, we cannot provide financial advice, but we can help manage and reduce your debt without you having to dip into your super.

As a registered charity, we have no financial interest in you accessing your super. In general, we advise against it and offer alternatives where possible. In short, we always try to offer real alternatives to managing your debt that do not impact your savings for your retirement.

We do this by consolidating your debt payments and taking over negotiations with your creditors. The best part is, we’re a completely free service and there are no hidden fees or costs. Our dedicated team of professionals are funded by some of Australia’s leading financial institutions, allowing us to help you find your way forward, faster.

How Way Forward can help in simple steps:

Step 1: Reach out to our team

Step 2: We evaluate your circumstance and verify your financial situation

Step 3: We take over negotiations with your creditors and act on your behalf

Step 4: We put together a manageable plan and combine your repayments to one reoccurring payment across your creditors

Do I qualify to use my super to pay off my debts?

There are only two reasons for withdrawing super early. We’ve listed below these two conditions you are required to meet and who to contact next if you qualify.

Before considering an early super release, we recommend speaking with your creditors or a free Financial Counsellor to consider alternatives to accessing your super now, as this can have financial implications in the future. Alternatives to early super release include asking your creditor for a hold on repayments, renegotiating the terms of your agreement or in specific circumstances, your creditor may agree to a partial or full debt waiver.

If you’d like advice on your specific circumstance, you can call the National Debt Helpline and speak to a Financial Counsellor on 1800 007 007.

We’ve directly quoted government sources in the below table to avoid any confusion.

TWO REASONS FOR WITHDRAWING SUPER EARLY

Early access on compassionate grounds Access due to severe financial hardship
According to the ATO:

You may be allowed to withdraw some of your super on compassionate grounds for unpaid expenses. This is where you have no other means of paying for these expenses.

The amount of super you can withdraw is limited to what you reasonably need to meet the unpaid expense.

Compassionate grounds include needing money to pay for:

  • medical treatment and medical transport for you or your dependant
  • making a payment on a home loan or council rates so you don’t lose your home
  • modifying your home or vehicle to accommodate your or your dependant’s severe disability
  • palliative care for you or your dependant
  • expenses associated with the death, funeral or burial of your dependant.
According to the ATO:

You may be able to withdraw some of your super if you meet both these conditions:

  • You have received eligible government income support payments continuously for 26 weeks.
  • You are not able to meet reasonable and immediate family living expenses.

If you withdraw super due to severe financial hardship it is taxed as a super lump sum.

The minimum amount that can be withdrawn is $1,000 and the maximum amount is $10,000. If your super balance is less than $1,000 you can withdraw up to your remaining balance after tax.

You can only make one withdrawal in any 12-month period.

I qualify for the above conditions for early access on compassionate grounds. What next? I qualify for the above conditions due to severe hardship. What next?
You can apply for early access to your super on compassionate grounds on ATO’s website. According to Services Australia:

  • You can apply for early access to your super because of severe financial hardship through your super fund.
  • They may want evidence to confirm if you meet the income support requirements for financial hardship, which can be provided by Services Australia.

For more guidance, head to Services Australia’s web page.

Recommended government sources to learn more about your super:

  • MoneySmart is a government-backed website that offers helpful guidance on super and superannuation calculator to get on top of your super
  • Australian.gov.au offers guidance and helpful links into critical aspects of your super such as how to consolidate your super funds and how to find your lost super
  • Australian Taxation Office offers helpful basics guide to super

How can Way Forward help?

At Way Forward, we cannot provide financial advice, but we can help manage and reduce your debt.

We’re a completely free service and there are no hidden fees or costs. Our dedicated team of professionals are funded by some of Australia’s leading financial institutions, allowing us to help you find your way forward, faster.

How Way Forward can help in simple steps:

Step 1: Reach out to our team

Step 2: We evaluate your circumstance and verify your financial situation

Step 3: We take over negotiations with your creditors and act on your behalf

Step 4: We put together a manageable plan and combine your repayments to one reoccurring payment across your creditors

Get help to overcome your debt today.

L O A D I N G