Struggling with accumulating debts you can’t seem to repay? Accessing your superannuation fund prematurely may seem like a good idea to pay off debts and get ahead. There are options available for you to withdraw your super early to repay debts which include applying for early superannuation release on compassionate grounds or for severe financial hardship. If you do qualify, however, you will be paying tax on the super you withdraw early and there would, of course, be a reduced amount of super for you live on when you do finally decide to retire.
If you are not meeting your household living expenses, withdrawing your super to pay off debts is only a short-term solution. There are other long-term options which can help you move forward financially that will not reduce your retirement savings and impact your future financial situation.
How to Withdraw Your Super Early to Pay Off Debts
To have your superannuation released early to pay off debts, there are 2 options to qualify:
- Severe financial hardship, or
- On compassionate grounds where you are preventing foreclosure or forced sale of your home.
Severe Financial Hardship
To be eligible to use your super to pay off outstanding debts under severe financial hardship, you must prove you have been receiving government income support benefits continuously for 26 weeks and are unable to afford your day-to-day living expenses. You can take out up to a maximum of $10,000 in a lump sum, but can only make one withdrawal every 12 months. Once you take out your super under severe financial hardship, it will be taxed accordingly. If you are under 60 years old, it will be taxed between 17% and 22%, whereas if you are older, it won’t be taxed at all.
Compassionate Grounds
You have the ability to withdraw some of your superannuation on compassionate grounds your mortgage must be in arrears and your lender must be threatening to repossess or sell your home, you can apply for a maximum of:
- Three months’ worth of repayments, and
- 12 months’ worth of the interest on the outstanding balance of the loan.
Accessing your super early on compassionate grounds can only occur once every 12 months. It will also be taxed as normal, generally between 17% and 22% if you are under 60 years old. Unless one of the above cases applies to you, your superannuation should not be accessed before retirement age.
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Accessing Your Super Early May Not Pay Off All Your Debts
Unless accessing your superannuation early will cover all of your debts, or will save your family home from being repossessed, there are better long-term solutions which will see you sustain financial management of ongoing household expenses. Superannuation is there for retirement and as you may live for at least 20 years after you retire, you need your super money to live on. Having less super available also means if you have another period of financial hardship, you won’t have a backup plan. Initiating Debt Consolidation, an Informal Agreement or Part IX (9) Debt Agreement could help you get rid of your debts without having to chip away at your superannuation before retirement. These options should be considered and exhausted before you decide to use your super to pay off your debt.
Other Solutions to Pay off Your Debts Without Using Your Super
Debt Consolidation
Debt Consolidation is a positive solution to combat overwhelming debt, instead of digging into your super funds. A debt consolidation will roll all of your existing debts, such as personal loans, credit cards and mortgage repayments into one, easy-to-manage loan. Some positives of debt consolidation loans include:
- It will reduce your debts,
- You will only have to manage one easy repayment with a single interest rate and set of fees, and
- Your creditors will stop harassing you.
Informal Agreement
An Informal Agreement is an agreement between you and your credits to change the terms on your existing debt contracts. It gives you a way to get out of debt without the consequences of a Part 9 Debt Agreement or Bankruptcy. Our professional debt negotiators at Revive Financial can work to reduce your debt through a number of ways, including:
- Pausing interest and fees on your debts,
- Reducing interest and fees on your debts,
- Settling your debt by paying a reduced amount in a lump sum payment,
- Settling your debt by paying a reduced amount over an agreed period of time, or
- Negotiating a complete waiver of your debts.
An Informal Agreement is a positive solution to repaying your debts and not withdrawing from your superannuation early. It will allow you to repay your debts on negotiated terms, so you can continue to grow your super for when you retire.
Part 9 Debt Agreement
A Formal Part 9 Debt Agreement is a legal and binding agreement between you and your creditors. It outlines a new, affordable repayment schedule which allows you to repay only a percentage of each dollar you owe, while being able to get on with your life and avoid the harsh consequences of Bankruptcy. This solution should be considered last, as it does impact your credit file in the short-term. But it is a better alternative than accessing your superannuation early. A Debt Agreement will:
- Reduce the amount of your unsecured debt by only paying a percentage of each dollar you owe to your creditors,
- Eliminate the interest and fees on your existing debts,
- Stop harassing phone calls from your creditors and debt collectors, and
- Give you breathing space so you can pay your debts and not have it impact your current lifestyle.
Use Your Super Only as a Last Resort
More and more people are getting into trouble because their expenses are greater than their income, which is something an injection of cash from your superannuation unfortunately won’t fix. There are, however, some things you can do to get out of debt fast. This includes creating a budget, implementing a debt reduction strategy and cutting back on expenses. The only time you should access your superannuation early is for serious cases, such as if it’s a last resort to save your family home due to being unable to pay your mortgage. If you’re struggling with debt, there are options available to relieve you of the stress. Talk to an expert today at Revive Financial who can tailor a debt relief solution to your individual needs. Get in touch for a free consultation on 1800 534 534.
