How to top up your super if your withdrew it during COVID

Around 2.6 million Australians made use of temporarily relaxed superannuation withdrawal rules to take out $37.8 billion from their accounts during the early stages of the COVID-19 pandemic, research released last week has revealed.

Introduced by the former government as a support measure for those who had been financially impacted by the pandemic, eligible Australians were able to withdraw up to $10,000 from their superannuation between April 20 and June 30, 2020, and another $10,000 between July 1 and December 31, 2020.

The research, produced by academics from ANU, George Washington University and Harvard, found that roughly one in six working-aged Australians dipped into their super during the period - three-quarters of whom withdrew the maximum $10,000 permitted during each window. The average withdrawal made across both windows was $13,584.

While it appears that some of the funds went towards rent and debt repayments, the research identified an increase in money spent on gambling. In fact, gambling was the third largest discernible spending category behind cash withdrawals at ATMs and debt repayments, and ahead of credit card repayments.

Bernie Dean, chief executive of Industry Super Australia (ISA), says that the research backs up concerns raised about the scheme at the time.

"While COVID was a tough time, encouraging people to raid their super before offering other support like JobKeeper was a big mistake - and this latest study confirms it.

"People faced a wicked choice between sacrificing their retirement savings and bailing themselves out during the early stages of the covid pandemic. No government should ever force Australians to make that choice again."

Beyond the issue of how money withdrawn was initially spent, the impact of the scheme is likely to be felt in the decades to come by way of shortfalls in the superannuation balances of withdrawers who, the research found, withdrew half of their balances on average.

Modelling produced by Industry Super Australia found that a 30-year-old who withdrew the maximum $20,000 during 2020 would be $80,000 worse off by the time they retire. Additionally, ISA estimates that for every $1 taken out, as much as $2.50 will need to be added towards age pension funding.

"There's a steep price to the early release scheme that everyone will have to pay over decades. Those who took out the money are worse off in retirement and more reliant on the age pension, which we all pay through higher taxes," says Dean.

How can early withdrawers catch up?

Among other characteristics, the research found that Australians who did tap into their super were younger on average than those who didn't. One potential upside to that is that younger Australians who did withdraw money have more time to rectify any superannuation deficit they may face at retirement.

Xavier O'Halloran, director of Super Consumers Australia, says that before anything else, it's important for people to work out how much they'll need to retire though.

"What we really encourage is to figure out what kind of standard of living you're going for. Are you looking to maintain your standard of living from your working life into retirement, which is what most people are trying to do?

"Then start to break down your costs. There are plenty of calculators and tools that can help you do this through the super funds and also on the MoneySmart website, which can be a good starting point to figure out how much you would need to spend in retirement. And then marry that up with how much you are likely to have by the time you retire.

"I think some of the people that withdrew super early might find that actually, between the age pension and their private superannuation savings, they may not have quite as much as they would need to maintain that standard of living. And so those people may look to make additional contributions."

So what are some of the possibilities for making extra super contributions - those that are in addition to the contributions already received through an employer?

1. Salary sacrificing

Australians can currently make up to $27,500 in voluntary contributions each year towards their superannuation which are taxed at a concessional rate of 15% which, typically, will be lower than the marginal tax rate. One of the ways to do this is by entering into a salary sacrifice agreement with your employer in which some of your pre-tax salary or wages are directed into your super.

2. After-tax contributions

It's also possible to make voluntary after-tax contributions to your super from your savings which you may be able to claim a tax deduction on. These can be arranged through your own superannuation fund and can generally be made via a simple transfer.

3. Government co-contributions

The government also offers superannuation co-contributions to eligible low and middle income earners who make after-tax contributions to their super. The government will chip in 50 cents for every dollar you contribute, up to a maximum of $500 (so $1,000 contributed on your end).

4. Downsizer contributions

Australians who are aged 55 years or older can also top up their super via the sale of their family home (if it's been owned for at least 10 years). Contributions of up to $300,000 can be made by individuals or up to $600,000 by a couple.

The good news for those considering topping up their superannuation after making a withdrawal during COVID is that the government has since initiated a re-contribution scheme that has special allowances for certain contributions. For more information, check out our article on catch-up contributions.

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