When people find themselves in financial strife — whether that may be related to bankruptcy, divorce, the loss of a job, the need to access capital quickly or any of life’s challenges — tapping into your superannuation fund can sound tempting.
So if you find yourself in dire straits, such as facing bankruptcy, can you and should you raid your superannuation?
The short answer is that it may be possible to access your super fund in these circumstances – but it is not always wise to do so.
Why? The rules around bankruptcy and the early withdrawal of funds from your superannuation can be complex.
Under the Bankruptcy Act 1966, superannuation is what is known as a non-divisible asset, which means it is protected from your creditors. If you enter bankruptcy, therefore, your superannuation remains safe and cannot be divided up along with your other assets for the benefit of your creditors.
However, that protection vanishes if you withdraw superannuation prior to bankruptcy. As soon as that happens, the funds become available to a bankruptcy trustee, including any assets you might have acquired with that money.
It is worth noting here that although superannuation is protected during bankruptcy, the trustee will investigate any transfer of funds made into your superannuation account and/or the transfer of funds where the contributor is a third party, if the transactions are done in a bid to defeat your creditors. You can’t put money into your superannuation or direct someone to transfer money on your behalf into your superannuation just to avoid paying your debts.
The other piece of legislation that is relevant is the Superannuation Industry (Supervision) Act 1993, which governs the withdrawal of super money.
Under these rules, superannuation is supposed to be money put aside during your working life to use in retirement.
In most cases, the rules stop you from accessing that money until you satisfy what is known as a condition of release, most commonly that you reach the ‘preservation age’ and either retire or start the transition to a retirement income, or that you turn 65.
Your preservation age depends on your date of birth. If you were born before 1 July 1960, it is age 55; for those born in later years it could be up to the age of 60.
But there are other conditions of release that can allow you to access super, including cases of “severe financial hardship”. This is defined as being when you are unable to pay reasonable and immediate family living costs and have been on an eligible income support payment through Centrelink for at least 26 weeks in a row.
In this case, you can withdraw a minimum of $1,000 and a maximum of $10,000, with only one withdrawal from your super fund because of severe financial hardship in any 12-month period. Be aware that you may need to pay tax on the amount withdrawn, depending on whether tax was paid at the time the money went into your superannuation fund, and your super fund may also charge you a fee for the early release of funds. In addition, an early release of super may reduce Centrelink payments and could affect any insurance in place with the super fund.
At Pitcher Partners we specialise in Corporate and Personal Insolvency, we are a leading provider of services to financially distressed companies and individuals. Please do not hesitate to contact us should you wish to discuss further in relation to your financial situation.