FAQs, tips and traps with COVID-19 superannuation relief | AMP Capital

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FAQs, tips and traps with COVID-19 superannuation relief

FAQs, tips and traps with COVID-19 superannuation relief

The federal government has allowed a raft of temporary superannuation changes in response to COVID-19. There are technical considerations in relation to accessibility and eligibility, and importantly, long-term challenges to think about before going ahead.

The human health emergency that is COVID-19 has had a rapid and radical impact on basic societal functioning. As we now well know, it’s also pummelled local share markets, wiping about a third of their value off over a one-month period.

The government and regulators have responded with considerable, temporary allowances in the superannuation environment. Some of these measures require self-certification, others have some restrictions to be wary of, and all of them require deep consideration before actioning, so you don’t end up worse off in the long run.

Early access to superannuation: the technical

The superannuation legislation has now been amended to allow individuals to draw down on some of their preserved superannuation changes early.

This is a temporary measure that can be applied for once in this financial year and once next financial year, up until September 24 this year. Up to $10,000 per application from preserved superannuation savings can be accessed.

Peter Burgess, general manager of technical services and education at SuperConcepts, explained some parts of the measures that need to be kept in mind:

  • Both amounts can’t be applied for in one application. So, if $20,000 is required, so are two separate application forms, lodged in separate financial years.
  • The application process is open from April 20 via the ATO website, and a MyGov account is required.
  • Eligibility is self-certified.
  • Criteria for eligibility includes: Being unemployed or in receipt of certain types of government income support payments, or on or after January 1 this year being made redundant or having your working hours reduced by 20 per cent of more (or your turnover reduced by 20 per cent or more, if you are a sole trader).
  • Important to note that eligibility tests consider working hours, not pay cuts. So if working hours are the same but a person has taken a 20 per cent pay cut, on face value, they don’t qualify.

Early access to superannuation: the traps

It’s important to remember some lessons from history when it comes to considering early release of superannuation as an option during this market disruption.

During the GFC, when investors watched their cash wiped out in just about one foul swoop, many panicked as markets were taking a dive and moved their funds into cash accounts. Though the panic is understandable, for many this locked in a loss, and worse, short-term decisions detracted from long-term savings goals. Modelling from Industry Super Australia1  reflects this:

At the last major market decline – during the Global Financial Crisis (GFC) – savers who moved their money from an average balanced industry fund into cash were $4,000 worse off after three months, $13,800 after a year, $34,800 worse off after five years and after seven years would have lost a whopping $46,000 of potential retirement savings.

Some may be fearing their superannuation balances will fall further, and feel more secure holding some funds in cash. As our head of retirement Darren Beesley said in a recent piece, you’d be forgiven for needing a stiff drink as a retiree watching their superannuation at the moment.

Still, it stands that a short term move to a ‘safer’ environment doesn’t necessarily garner an ideal result. As highlighted in an analysis by consulting firm BDO Australia2, the average base rates of Australia savings accounts in 2019 was 0.92 per cent per annum and for term deposits 1.71 per cent per annum which were lower than the rate of inflation of approximately 1.7 per cent for 2019.

It’s fair to assume these will now be dipping lower in 2020, with the official cash rate at an all-time low of 0.25 per cent.

With both of these examples, long-term goals are compromised by short-term moves. Ultimately, the current market freefall will end, and we will move into a recovery. Keeping your eyes on the long-term fundamentals of an investment decision is a rational way to manage a panicked, emotional time.

Changes to drawdown rates: FAQs

The federal government has also introduced a reduction in the minimum drawdown rates for account-based pensions by half for this financial year and next.

With account-based pensions and market-linked pensions, a minimum drawdown amount is required each year, but the government is effectively recognising here that the current rates (pre COVID-19) could trigger an adverse impact on portfolios during a market downturn. This measure is designed to let pension funds stay put, and give them a chance to recover.

Again, Peter Burgess explains the technical considerations and some common stumbling blocks:

  • If a person is receiving regular monthly pension payments, chances are they’ve already received more than what they need to under the new reduced drawdown requirements. In situations like that, pension payments can be switched off, and no further payments need to be taken for the rest of the income year. Alternatively, pension payments can be reduced.
  • People may continue to receive the same pension, it’s just an option to switch it off or adjust within the new allowances.
  • If a person has already taken more than what they’ve needed in light of the new drawdown allowances, the excess amount cannot simply be put back into a pension account. If a person is over 65, they would need to meet the work test in order to do that, because it would be classified as a contribution to superannuation and it would need to be put into an accumulation account in the fund and not back in their existing pension.

Final thoughts

The superannuation changes are designed to be supportive of a person’s financial needs, particularly if they are in distress. Of course, in many cases this will unfortunately be unavoidable, and support measures of this nature are necessary to see them through what is a crippling crisis for some.

Still, it’s important to consider that a short-term fix may not suit a long-term need, and any moves to access superannuation or reduce its compound benefits should be well thought out before implementing.

Important information

While every care has been taken in the preparation of this video, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This video has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.

Original Author: Produced by AMP Capital and published on 16/04/2020 Source