When debts are mounting and cash flow is tight, your superannuation balance can look like an obvious source of funds. After all, it is your money. But can you access your super early simply to pay creditors?
Generally, no. Superannuation is preserved for retirement and can only be accessed early in limited circumstances. More importantly, for someone considering bankruptcy, withdrawing super to pay debts can have consequences that should be understood before acting.
When can you access super early?
Having significant debts does not, by itself, allow you to withdraw your super.
The Australian Taxation Office says early access is only available in limited circumstances, including:
severe financial hardship;
certain compassionate grounds;
terminal illness; and
temporary or permanent incapacity.
Compassionate grounds can include certain medical expenses, palliative care, funeral expenses and preventing the foreclosure or forced sale of your home.
It is not a general way to pay credit cards, personal loans or other unsecured debts.
What happens to your super if you go bankrupt?
This is an important consideration.
Superannuation investments maintained with a regulated fund, approved deposit fund or exempt public sector scheme are generally not property that is available to creditors, unless a Court considers that the members’ pattern of past contributions to be “out of character” and made in an attempt to defeat creditors.
Timing matters.
Super payments received before bankruptcy may be claimed by the bankruptcy trustee. In contrast, a lump-sum payment received from a regulated super fund after bankruptcy is generally protected.
Super received as an income stream, such as a pension, may form part of your assessable income during bankruptcy.
Should you use super to pay your debts?
Even if you qualify for early access, withdrawing super may not be the best solution.
Before doing so, consider:
Will it actually solve the problem? Paying some debts may not help if the remaining debts are still unaffordable.
Are you considering bankruptcy? Your super may be protected while it remains in an eligible super fund.
What other options are available? Depending on your circumstances, alternatives may include negotiating with creditors or considering a formal personal insolvency option.
What will it mean for retirement? Accessing super now reduces the savings available to you later.
Get advice before withdrawing your super.
If your debts have become unmanageable, it is important to consider your overall financial position rather than simply using super to pay whichever creditors are demanding payment.
Bankruptcy has significant consequences and will not be appropriate for everyone. However, using retirement savings to pay debts that may otherwise be dealt with through bankruptcy can also have lasting consequences.
The key takeaway
You generally cannot access super simply to pay off debt.
If you qualify for early access and are also considering bankruptcy or another debt solution, obtain advice before withdrawing your super. The timing of a withdrawal can affect how those funds are treated and could materially change your financial position.
If you are experiencing financial difficulties and are unsure what to do next, you can arrange a free, confidential meeting with an insolvency practitioner at Worrells. We can discuss your financial position, explain the options available to you and help you understand the potential consequences before you make a decision.
