The pros and cons of using super to pay off debt

Is it possible to use superannuation savings to pay off debt? Is it a good idea? We look at the pros and cons of using super to pay off debt, which debts are eligible for early super release, and whether it’s worth it.

Please keep in mind that there are no one-size-fits-all solutions when it comes to money management, which is why this information is provided for general purposes only.

It’s there, but you can’t touch it.

Your superannuation savings are yours. The money’s sitting right there. You can see the balance. But you can’t touch it until retirement. 

For someone who’s in severe financial hardship, this can be incredibly frustrating—almost heartbreaking. What use, after all, is having money for retirement if you’re racked with stress from bills and debts today?

Superannuation rules

Superannuation, or ‘super’ as it’s known, is a method of saving for your retirement. While you are working, your employer puts a percentage of your salary into a special savings account held by a superannuation fund.

The fund’s job is to help your super savings grow so that you have money to live on in the future, when you are no longer working.

When you reach the appropriate ‘preservation age,’ you are able to withdraw all of your superannuation if you’re fully retired, or up to 10 percent every 12 months if you’re still working.

The preservation age is the minimum age set by the government to access your super. According to the Australian Taxation Office (ATO) website, that age is currently 55 to 60, depending on when you were born. At 65, you have access to all of your super, whether you’re working or retired.

Rules are made to be broken

In light of the government safety net of the age pension continuously shrinking, saving for retirement has never been more important. But retirement is a long way off for a lot of people and much lower priority than ‘here and now’ for someone experiencing severe financial hardship. 

That’s why the government recognises that there are certain situations where early super access makes sense. 

During the Covid-19 pandemic, the government introduced special laws that gave people unprecedented access to their superannuation savings for a set period of time. That scheme has ended, but it doesn’t mean that you can’t still access your super in extraordinary circumstances.

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Imagine, for example, needing expensive life-saving medical treatment. Accessing your super could be the difference between life and death. 

Or for someone with outstanding loan repayments or rent arrears, having access to super funds could prevent foreclosure or eviction.

For this reason, the government has provided two grounds on which superannuation funds may allow early withdrawals:

Financial hardship

This covers reasonable immediate family living expenses, including loan repayments, rent arrears, outstanding bills, car repairs and to pay medical or disability expenses. Credit card debt is not generally considered grounds for early super withdrawal.

Compassionate grounds

This covers medical, disability or funeral expenses, or money used to prevent the sale of your home due to unpaid loan repayments or council rates.

Eligibility for accessing super early

To be eligible for an early super withdrawal on financial hardship grounds, you would need to have been receiving government income support for at least 26 weeks continuously prior to applying, and not be able to meet your essential family living costs.

Hardship applications may be made directly to your super fund. But keep in mind that different funds have different rules and they are under no obligation to approve your application. 

For early release of super on compassionate grounds, applications are processed by the Department of Human Services. 

Eligible reasons include:

• Paying for medical treatment for you or a dependant
• Making a payment on a loan to prevent you from losing your home
• Modifying your home or vehicle for the special needs of you or a dependant because of a severe disability
• Paying for expenses associated with a death, funeral or burial of a dependant

Pros and cons of withdrawing your superannuation early

For some, the benefits of an early super withdrawal could include accessing critical medical treatment, being able to live independently, keeping a roof over your head or avoiding bankruptcy.

However, the potential downsides deserve careful consideration. 

Firstly, there’s a maximum limit to how much money you can withdraw:

• For financial hardship, the maximum amount is $10,000.
• In the case of mortgage arrears, the maximum is three months of repayments and 12 months’ interest on the outstanding balance of the loan.
• For council rates, the amount is capped at the value of arrears.

And remember, taking money out of your super account now means you’ll have less money for retirement.

It would also potentially give your creditors (companies and people you owe money) access to savings they wouldn’t normally be able to touch. That being said, it could get those creditors off your back. 

Analyse your alternatives with a budget

There could more than one way to alleviate financial stressors. For instance, what if you could refinance your home? Or negotiate a break from payments? Or pay your way out of debt? 

The challenge, however, is being able to see the forest for the trees. Plus, you want to be able to design and choose a strategy that doesn’t just relieve the symptoms, but fixes the problem once and for all. 

So, where to begin? The first step to understanding all of your options is to create a personal or household budget — a customised money plan that captures all of your income and expenses over a 12-month period. 

Once you have a detailed budget, you can then analyse your cash flow, model different scenarios and map your way out of the crisis.

That’s how MyBudget can help 

A MyBudget money expert can meet with you to go through your financial commitments and come up with a detailed budget that gives you absolute visibility over your finances. 

We can then help you to understand your alternatives and choose the right strategy for you. We may even be able to talk with your bank and other creditors for you.

Don’t face another period of stress or uncertainty. Talk for free with a MyBudget money expert. A 12-month customised money plan can assist you in making more informed decisions with your finances.

And to keep up to date with all things budgeting, be sure to subscribe to our fortnightly newsletter.

This content has been updated from the original post published in October, 2019

About the writer

Kylie Hughes

Kylie Hughes has worked in financial services in Australia and overseas, and has been writing about money, personal finance and budgeting for more than a decade. As a mum, she understands the real-life challenge of balancing financial priorities and budgeting for a fun, inspiring, affordable family life!