26 April 2020
By Colin Lewis, Head of Technical Services, Fitzpatricks Private Wealth
Non-preserved superannuation benefits may be impacted by the downturn in markets.
With the outbreak of the Coronavirus, the amount I have in superannuation has dropped significantly with the dramatic downturn in share markets around the world. Obviously, I’m not alone. Apart from the impact on my super balance, which is now much lower than I would like it to be, I have heard that there could also be an impact on the amount that I’m already eligible to withdraw, but keeping in super. Is this right?
We’re living in turbulent times … again. It’s been a wild ride on global share markets in the last few weeks, after a month of significant falls.
Yes, you have heard right. An unintended consequence of this downturn in global markets can be an impact on any ‘non-preserved’ superannuation benefits you may have in your super fund.
As most people know, superannuation is generally locked up until retirement. That is, superannuation benefits are ‘preserved’.
Certain life events allow you to access your super, such as retirement, reaching age 65, permanent incapacity, etc. Suffering financial hardship – most relevant in this environment – is another. These are called ‘conditions of release’ and once you have satisfied one of these conditions, the preservation status of your benefits changes from being one of ‘preserved’ to ‘unrestricted non-preserved’ and you are eligible to withdraw your benefits as a lump sum, or an income stream, e.g. account-based pension, or a combination of lump sum and income stream. Of course, you don’t have to withdraw your benefits and may keep them in super to withdraw later when you want too. In this case, your benefits remain unrestricted non-preserved for access at any time, subject to the governing rules of the fund.
There is another preservation category that relates to any contributions you may have made to a company super fund before 1 July 1999. These are ‘restricted non-preserved’ benefits which can be accessed once the employment arrangement they relate to has been terminated, i.e. you finish with the employer, regardless of your age.
Your super fund reports the preservation status of your benefits in your annual statement. So, apart from reporting your total benefits in the fund, along with a range of other information, you are advised of the amount of your preserved benefits, restricted non-preserved benefits and unrestricted non-preserved benefits.
So, how does a downturn in markets impact the preservation status of your benefits?
Like we saw during the GFC, there may be a permanent reduction in a super fund member’s unrestricted non-preserved benefits and/or restricted non-preserved benefits.
If, at a super fund’s reporting date, a member’s unrestricted non-preserved benefits and/or restricted non-preserved benefits have reduced due to the downturn in global markets, then the lower value(s) will be locked-in permanently. Whilst a member’s unrestricted non-preserved benefits and/or restricted non-preserved benefits may fluctuate between reporting periods, it’s the value at the fund’s reporting date that is critical.
Let’s say that as at 31 December 2019, your superannuation benefit of $100,000 was $80,000 non-preserved and $20,000 preserved.
Move forward to 30 June 2020 and your benefit has dropped to $75,000. Consequently, your unrestricted non-preserved benefits will be $75,000. There is no preserved benefit.
Later, when the markets recover and your super goes back up to $100,000, your unrestricted non-preserved benefits remain at $75,000. It does not go back up to its original value of $80,000.
There has been a permanent reduction of $5,000 in the amount you can access.
If your super fund reports quarterly, then it will be the value at that time. Say your fund reports as at 30 April 2020 when your superannuation benefit is $70,000, then your unrestricted non-preserved benefits will be $70,000.
Accordingly, your benefit of $75,000 at 30 June 2020 will be $70,000 unrestricted non-preserved and $5,000 preserved.
However, you may be able to stop this happening. It’s important to note that if you can top-up your superannuation benefits – by contributing additional monies (if eligible) and/or rolling over a benefit from another fund – before the fund’s reporting date, you may avoid any reduction to your unrestricted non-preserved benefits. The aim is to ensure your total benefit is equal to or greater than the original value of your unrestricted non-preserved benefits in the fund.
So, if you’re facing this situation and wishing to maintain the amount you are now able to access in super, i.e. your unrestricted non-preserved benefits, consider topping up your benefits. Importantly, it’s critical to know your super fund’s reporting date.
It’s worth mentioning that this issue is only relevant to the preservation components of your superannuation benefits and does not apply to the tax components of your benefit.