Should you use your super to pay off a debt? 

debt superannuation May 22, 2023

By David Berry 

Way Forward is a debt charity that provides free support to people in financial hardship. 
The information provided here is not financial advice. We recommend you speak with our team, a financial counsellor or local community legal centre to find out what options might be available.  

If you’re considering withdrawing a lump sum of money from your super to pay off a debt or use it to buy something costly, it’s worth considering the consequences.  

What is super or superannuation? 🤔

Super is a government initiative that saves money for your retirement. Your employer is legally required to pay a part of your earnings to a super fund that you have nominated. The percentage of super that your employer pays can vary. However, under the super guarantee (SG) employers are legally required to pay a minimum of 10.5 percent of your base earnings to avoid paying a super guarantee charge. The SG is planned to progressively increase to 12 percent by 2025. 

What are the benefits to keeping your super safe? 💰

Withdrawing super early can get complicated. There are also potential repercussions for your retirement, so we recommend doing everything you can to avoid using your super to pay off debt (or for any other reason). Here’s why.

1. Super (while in your fund) is protected from bankruptcy and your creditors. 

This protection is lost once you withdraw from your fund. 

2. Tax is paid on any super withdrawals. 

For example, if withdrawing $10,000 (which is the maximum withdrawal per annum) you will end up with approx. $8,000 depending on your circumstance. According to ATO, “There are no special tax rates for a super withdrawal because of severe financial hardship. It is paid and taxed as a normal super lump sum. If you are under 60 years old, this is generally taxed between 17% and 22%. If you are older than 60 years old, you will not be taxed.” 

3. You may lose insurance benefits such as income protection or total and permanent disability (TPD) insurance.  

And if you’ve ended up in financial hardship due to loss of income, check your super policy to see if you’re covered by insurance like income protection. Please consult your super fund for more information on your fund and particular situation. 

4. Your super is safe thanks to the ABA’s Banking Code. 

According to the Australian Banking Association’s ‘Banking Code’ that sets standards for customer service across Australia’s banks, banks will not require you to access your superannuation to pay any amount you owe them under a loan (unless you are borrowing for a self-managed superannuation fund). See participating banks and more details here. 

Should I use super to pay off debt? 😬

Using super to pay off debt might seem like a simple fix to your current problems, but it will make a big dent in your retirement savings. This is because you will lose on the cumulative interest for that sum that you’d gather otherwise for decades to come. More about compounding interest is explained below. 

If you’re in financial hardship, we strongly recommend exploring alternatives before you dip into your super. Way Forward, among other organisations, have a range of resources for getting help with money. 

It’s also worth consulting a reliable expert such as a financial planner or lawyer before making the final choice. 

Can I use my super to pay off debt? 💳

It is possible to access your super if you’re in hardship and struggling to pay your bills. However, the specifics of how to do this, like how much money you can withdraw and the circumstances in which it can happen, depend on your super providers policies.  

And not all super funds allow early withdrawal on the grounds of severe financial hardship or compassionate reasons.   

The first step is to check with your particular super fund to see what the rules are. 

You might also be considered for early super access if you were a temporary resident working in Australia and left the country. 

We recommend checking in with a reliable expert such as a financial planner or lawyer (you can get free legal advice via a community legal centre or legal aid) before making a big decision like this. 

Many scammers are targeting Australians trying to offer schemes for early access to super – these schemes are illegal and heavy penalties apply. Always ensure the person advising you has the right credentials and your best interests at heart. 

Do I qualify to use my super to pay off my debts? 💵 

There are only two reasons for withdrawing super early: Compassionate grounds and severe financial hardship. The Australian Tax Office have published detailed information on their website about this. 

Here’s a snapshot of what it might look like to qualify for early super withdrawal:  




According to the ATO: 

You may be allowed to withdraw some of your super on compassionate grounds for unpaid expenses. This is where you have no other means of paying for these expenses. 

The amount of super you can withdraw is limited to what you reasonably need to meet the unpaid expense. 

Compassionate grounds include needing money to pay for: 

  • medical treatment and medical transport for you or your dependant 
  • making a payment on a home loan or council rates so you don’t lose your home 
  • modifying your home or vehicle to accommodate your or your dependant’s severe disability 
  • palliative care for you or your dependant 
  • expenses associated with the death, funeral or burial of your dependant. 

According to the ATO: 

You may be able to withdraw some of your super if you meet both these conditions: 

  • You have received eligible government income support payments continuously for 26 weeks. 
  • You are not able to meet reasonable and immediate family living expenses. 

If you withdraw super due to severe financial hardship it is taxed as a super lump sum. 

The minimum amount that can be withdrawn is $1,000 and the maximum amount is $10,000. If your super balance is less than $1,000 you can withdraw up to your remaining balance after tax. 

You can only make one withdrawal in any 12-month period. 



You can apply for early access to your super on compassionate grounds on ATO’s website. 

According to Services Australia: 

  • You can apply for early access to your super because of severe financial hardship through your super fund. 
  • They may want evidence to confirm if you meet the income support requirements for financial hardship, which can be provided by Services Australia. 

For more guidance, head to Services Australia’s web page. 


What’s the long-term impact of using super for paying off debt? 🤯

If you dip into your super before retirement, you may lose earnings from ‘compound interest’.  

Simply put, this is the interest you earn on interest.  

Let’s use an example from the Australian Tax Office (ATO) to make this even clearer: 

Jackie makes an initial deposit of $1,000 into a compounding interest account which has a 5 percent rate. After 1 year, Jackie makes $50 so her new total is $1,050. After another year of not touching this money, it will increase to $1,102.5. 

This isn’t a huge increase but if Jackie leaves her money compounding for years this is what happens: 

Year 5: $1,276.28 
Year 10: $1,628.89 
Year 25: $3,386.35 

Year 50: $11,467.40 

Say you took $1,000 from your super fund today, this means you’ll potentially lose out on growing your money to $11,467.40, if you were to retire 50 years later (and that fund was performing at a steady interest rate of 5% for those years). 

If that’s the impact on $1,000… imagine how this might impact possible compounding interest earnings if you withdrew $10,000 from your super today. 

There are plenty of online compound interest calculators that can demonstrate that any sum of money can earn you over time with compounding interest. 

For example, you can try this compound interest calculator on MoneySmart.  

What are the alternatives to using super to pay debt? 🤑

If you’re unable to pay off a debt, there’s many alternatives. These include debt consolidation, payment consolidation, asking for moratoriums, renegotiating payments with your creditors, asking for a reduction in interest rates, working up a manageable budget and repayment plan or even waiving parts of your debt for legitimate reasons. 

These are all options before considering dipping into your super or considering bankruptcy. 

How is my super changing? ✍🏼

You may have seen that from July 2021, the super guarantee rate rose from 9.5% to 10% and it’s scheduled to progressively increase to 12% by July 2025. You can find more on this on ATO’s website. 

Regulations and rules around super continuously change, so stay on top of the latest government updates and always make sure you use credible, trusted sources to find information. 

How can Way Forward help? 🧐

At Way Forward, we cannot provide financial advice, but we can help manage and reduce your debt without you having to dip into your super. 

As a registered charity, we have no financial interest in you accessing your super. In general, we advise against it and offer alternatives where possible. In short, we always try to offer real alternatives to managing your debt that do not impact your savings for your retirement. 

We do this by consolidating your debt payments and taking over negotiations with your creditors. The best part is, we’re a completely free service and there are no hidden fees or costs. Our dedicated team of professionals are funded by some of Australia’s leading financial institutions, allowing us to help you find your way forward, faster. 

How Way Forward can help in simple steps: 

  • Step 1: Reach out to our team 
  • Step 2: We evaluate your circumstance and verify your financial situation 
  • Step 3: We take over negotiations with your creditors and act on your behalf 
  • Step 4: We put together a manageable plan and combine your repayments to one reoccurring payment across your creditors 

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If you’d like advice on your specific circumstance, you can call the National Debt Helpline and speak to a Financial Counsellor on 1800 007 007.

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