Superannuation, also known as “super” is money that your employer puts aside for you to use during your retirement. Super is one of the most important components of effectively saving for retirement. Without it, many people would find themselves financially unprepared for life after work.
If you’re struggling to pay off your debts, it could be tempting to use some of this extra retirement money to make those payments. You might be decades away from retirement or you might expect to have a better savings plan by then. Either way, it’s easy to think your super is a great source of funds to pay down your debts and get out of a financial bind.
In reality, dipping into your super to pay off your debts is a bad move. If you use your superannuation early to pay the arrears on a loan, for example, you’re not really addressing the root of the problem. At the same time, you’re decreasing the amount of money you’ll have access to in retirement which could be risky. In this guide, we’ll explain why you shouldn’t use superannuation to pay off your debts.
What Is Superannuation?
First, let’s talk about what superannuation is and how it works. As we said before, this is money put aside by your employer throughout your working life. The more money you save in your super, the more you’ll have available when you retire.
This money is intended to be withdrawn only when you retire or turn 65 years of age, though there are some circumstances when you’re allowed to withdraw these funds early.
You don’t have to actively save super. Your employer pays this money into an account for you, and this is known as the “super guarantee contribution”. How much your employer pays into your super will be based on your earnings. Since July 2014, your employer is required to pay at least 9.5% of your earnings into super, and this usually rises throughout your career.
When Can You Withdraw Your Superannuation?
When exactly are you allowed to withdraw your superannuation? While the money is not supposed to be withdrawn before you retire, there are situations when you might be allowed to tap into these funds early. Here are the two grounds on which you might be allowed access:
- Compassionate Grounds – This usually means to prevent the repossession of your house by your unpaid mortgage or to pay for something such as medical care, disability, or funeral expenses.
- Severe Financial Hardship – The other option is in the case of severe financial hardship like loan repayment, rent arrears, car repairs, and outstanding bills.
However, just because you can withdraw this money early doesn’t mean you should. In order to gain access to either of these options, you need to provide information and supporting documents to prove you’re truly experiencing financial hardship. It can be a time-consuming process, and there are other actions you should take before using your super.
The Risk of Accessing Your Superannuation Early
There are a lot of reasons not to access your superannuation early, but the main concern is that it’s risky. While you might be able to pay your bills short-term, it’s not an effective way to manage your debt long-term.
For example, let’s say you access your super to pay the arrears on your mortgage. Unless this is a temporary situation, it’s unlikely that catching up on your mortgage payments will actually help you afford your home long-term. Ultimately, you’ll need to decide to sell your home or make a change, and using your super simply delayed this process.
Similarly, preparing for retirement is a big challenge. According to statistics, individuals need $42,569 per year. Find out if your retirement plan is on track. While it might seem harmless to rely on your super when you need it, you could be risking the income you’ll need to live when you retire.
Alternatives to Using Your Superannuation Early
If it’s not a good idea to use your super early, what should you do instead? The good news is you have a lot of options when it comes to solving temporary or even long-term financial problems. Consider these alternatives:
- Create a budget – Learning how to build a budget that works for you could help you cut down on unnecessary spending to free up more funds for your debt.
- Build your emergency fund – Another important step to avoid needing money for unexpected financial problems is to build an emergency fund. Having at least $500 (or more) in a savings account for life’s unexpected moments will keep your accounts above water.
- Consider another debt solution – There are a number of debt solutions that don’t require you to cash in your super. Debt consolidation, debt arrangements, and other options are there for you to use if you need to.
- Prepare for retirement – Last but not least, make sure you’re on track for retirement by checking in with your super earnings.
Get to the Root of Your Debt Troubles
Think of using your superannuation early as a temporary solution to a permanent problem. It’s tempting to use this money during times of financial hardship, like dealing with unmanageable debt, but this is a slippery slope.
That money is intended for your retirement, so keep it that way. Instead, talk to our money experts on 1300 368 322 today about smart ways to handle your budget and debt payoff to ensure you create healthy financial habits that will last you a lifetime. Your future self will thank you!