Australia’s superannuation and pension systems seem designed to confuse.
The rules and regulations for tax, working, eligibility, assets and income for both superannuation and the Age Pension are complex and require a depth of knowledge that is often beyond the average Australian.
But what if there was a simpler solution? What if we just blended super and the Age Pension in one pot? What if you could spend your super and contribute to it at the same time, instead of dividing it into accumulation and retirement phases.
That’s a proposal being put forward by AustralianSuper chief executive Paul Schroder.
Pool of savings
Mr Schroder told The Australian one single ‘account for life’ could incorporate the Age Pension into the pool of national super savings and let retirees recontribute while also drawing an income.
Changing the system certainly has government support.
In the discussion paper, Retirement Phase of Superannuation, released in December 2023, the government said while there has been a lot of focus and regulation about the accumulation phase of superannuation, there has been less attention given to the retirement phase.
“This concerted and sustained policy effort has seen the size of the system grow to $3.6 trillion in super assets – the fourth largest in the world,” the report states.
“These successes have set up Australia for better retirement outcomes but comparatively, there has been less consideration of the retirement phase of superannuation.
Set a vision
“Superannuation funds need to do more to understand their members’ retirement needs, set a vision for their members’ retirement outcomes, and provide well-rounded retirement products. There is a role for government and regulators in creating an environment that supports these changes.”
In response, the Albanese government proposed to encourage funds to create more annuity-style products to boost retirees’ confidence that they are not going to run out of money.
Mr Schroder said while annuities had their place, they were not going to be a solution for everyone.
“A mandatory national default product risks increasing complexity, stifling innovation and limiting the ability of funds to tailor their offering to meet specific member needs and preferences,” Mr Schroder said.
Remove barriers to pension
In its submission to the discussion paper, AustralianSuper said the Age Pension was already the ‘default longevity product’ and there should be programs towards removing barriers to access it.
“We recommend that, where a member requests it, superannuation funds should be able to provide integration of superannuation income streams with Age Pension income streams,” the submission stated.
Currently the sole purpose test prevents super funds from charging members collectively or using an intra-fund for super providers to apply for the Age Pension on their members’ behalf.
What does that all mean? The sole purpose test is an Australian Tax Office ruling that requires all activities of super funds to be directed at providing retirement funds for their members. Basically, it’s a protection so super funds don’t go off spending money on trustees or release money to members before retirement or any other non-income-bearing decisions.
Intra-fund advice is advice that super funds can provide to all members and the cost is borne by all members.
Super changes
So basically, government regulations mean super funds can’t apply for the Age Pension on your behalf, or develop provisions to do so, even though it may benefit both you and the super fund.
AustralianSuper claims that allowing super funds to apply for the pension on members’ behalf would result in significantly more people accessing their full benefits.
However, AustralianSuper wants to go one step further and develop an ‘account for life’ that would remove the inflexible shift between working and retirement.
“This would ease the transition between the ‘saving’ and ‘spending’ phases, and also provide the flexibility for additional contributions while members draw an income. This type of flexibility would support a diverse range of retirement journeys and make the system more member-centric,” Mr Schroder said.
What do you think? Would you like an ‘account for life’? Why not share your thoughts in the comments section below?
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It reads well. My only query would Centrelink still be responsible for working out one’s pension entitlement? Do away with Centrelink still being responsible for the pension component and set up a Universal Pension for all current recipients of the Aged Pension.
Agreed! Most developed countries have an universal pension, Australia is not treating its retirees well at all! It’s a huge disincentive for people to work and save during their life and instead rely on government – but that’s probably the plan. Not good for our long term economic prosperity and living standards, but it keeps politicians in power.
The devil is in the detail. Some nasty surprises could await.
Most importantly there should be an age pension for all regardless of income or assets. The more a person has earned and saved in life the more entitled they should be to an age pension as they have also paid much more tax. It would truly simplify things for retirees. It would also be an incentive for people to earn and save, and bring us in line with the rest of the developed world. I can’t see anything wrong with how superannuation works right now, why fix it if it ain’t broken? At present in “pension phase” income from the fund is not taxed, whilst in accumulation phase earnings are taxed at 15%. Is this going to be another tax grab? There is no mention made in this article of the tax implications.
How can you not see a lot wrong with how superannuation works now when the cost of tax concessions for wealthy people loading multi-million dollar war chests for lavish retirements is equal to the total cost of the Aged Pension, yet 80% of the latter goes to people in at least modest need while 80% of the former goes to the well-to-do? Super is being used as a tax haven. I would say it wasn’t meant to be used that way but actually I fear it was, but it should not be.
Certainly, the OAP means tests should be abolished. It’s insane incentivizing and rewarding over-investment in a lavish family home, generous gifting 5 years before retirement, and overspending, while punishing those who plan and save well. But along with that change, there should be a change to superannuation tax – removing all concessions once an account reaches the amount needed for a modestly comfortable retirement. Tax all retirement income – and I mean a MODESTLY comfortable retirement. Not millions. Say $700K per person, indexed to inflation.
I think it’s a great idea. Makes perfect sense. Let’s do it.