A framework for prioritising access to lump sum cash
For a temporary period, the Government allowed people to apply for early release of superannuation. Applications closed on December 31, 2020 so if you require access to your superannuation, the default rules apply.
- you have a terminal illness
- you have less than $200 in your super fund
- you’re a temporary resident permanently leaving Australia
- you are in severe financial hardship
- you meet ‘compassionate grounds’
- you’re temporarily or permanently incapacitated.
Remember, superannuation is meant for your retirement. Under normal circumstances, you can’t withdraw from your super until you’re at least age 60.
Using a hierarchy based on ease of access and cost of redeeming – let’s consider some options for prioritising access to lump sum cash.
1. On-call cash accounts: these are clearly the easiest and lowest cost source of funds. Cash should be readily available and with interest rates so low there is little cost of withdrawing funds.
2. Home mortgage offset or redraw facilities: if you have a home loan and either has money in your offset account or funds available within your credit limit, you may be able to draw on these monies. With interest rates at historic lows, this could be a very low-cost source of funding. It is advisable to talk to your tax accountant about how best to structure any transfer of funds between personal accounts and your business.
3. “Family bank”: do you have family members who have significant cash savings who may be happy to act as your bank and provide you with a loan? This can be an attractive arrangement for both parties – particularly where the lender gains a better rate of interest than having cash in a bank account or term deposit, and the borrower (you) gains access to funds to tide you through. It’s usually a good idea to have a solicitor assist you with drawing up a loan agreement, and again, gain advice from your tax accountant on any tax implications.
4. Credit cards, car finance and other unsecured loans: the cost of the borrowing is very expensive – credit cards can have annual interest rates as high as 20% and car finance as high as 15%. I would usually recommend always paying credit card debt within the interest-free period. However, we need different strategies for difficult times. Talk to your bank about options for a line of credit for your business. Consider applying for an additional credit limit on your credit card, or seek a new card. It could just buy you time. If you have a vehicle that you own, you may be able to finance it to free up lump sum cash.
5. Personal or trust fixed interest (bond) investments: if you have a personal or trust investment portfolio, you may be fortunate enough to have a financial adviser who has separated your fixed interest (or bond) investments from your equity investments. Because fixed interest investments are more stable, these investments are less likely to have devalued with the market shock. They are likely to be relatively liquid, and so easy and low cost to sell. You should be aware this strategy will tilt your portfolio to a higher weighting in riskier assets like shares which may be okay in the short term – but maybe a position from which you wish to rebalance in future.
6. Super fixed interest (bond) investments: the same applies as in point 5 – except this time it relates to your money in super.
7. Personal or trust share investments: with share markets having taken a significant tumble, it is generally not a good time to sell your share investments – as you make real the losses (which really only exist on paper if you can hold onto your shares until they recover). However, if you need cash, then it may make sense to sell down some shares. Perhaps you have some shareholdings that have withstood the downturn better than others. The silver lining is that you may have fewer capital gains tax – or even a capital loss that you can carry forward and use to offset future gains. Again, talk to your financial adviser and accountant before selling.
8. Residential or commercial property: this is one of the last things that you want to have to sell. Property is a highly illiquid asset, and it’s not divisible – you can’t sell off a bedroom or the kitchen, you have to sell the whole property. What’s more, typically selling a property takes time – not days or even weeks but months – and involves significant cost. The key challenge with illiquid assets in times of distress is that it can be hard to find a buyer – and if you can, it’s often at a depressed price.
Think of these eight ideas in our framework as pieces in a puzzle – you can rely on some or one. The best answer is what works for you and your business. And of course, do seek advice from your tax, financial adviser or legal professionals at this critical time.
The views expressed in this article are those of the author and do not necessarily represent the views of Business Australia.