Hundreds of thousands of retirees are being taxed, unnecessarily, perhaps because they do not understand which phase of superannuation their funds are in – or they’re lazy. Experts say it’s past time that funds put members ahead of profits.
Our compulsory super system is the envy of many countries. Since its introduction in 1992, Australians have collectively put away billions for their retirement, with the sector currently holding assets of about $3.5 trillion.
But most of the focus has been on the accumulation phase of super. That is the period during your working life when you are actively adding to your balance through employer and personal contributions.
Investment returns in the accumulation phase are taxed at a flat rate of 15 per cent.
But alongside these accumulation accounts, super funds also have ‘pension’ accounts, which are entirely tax-free and from which lump sums or income streams are paid typically in retirement.
A pension account can only be started when a condition of release is met, which will usually be at retirement, or at age 65, even if still working. However, some over-65s could have sound reasons for not starting a pension account, including how it interacts with the Age Pension.
Figures from AustralianSuper show that about 140,000 members over the age of 65 have super in accumulation accounts and are therefore paying tax on those earnings.
The Age explains that a 65-year-old who has $400,000 in an accumulation account that is earning 4 per cent over a 12-month period pays 15 per cent, or $2400, in tax on the earnings. Someone with a balance of $800,000 pays $4800 in earnings tax.
So, why do so many older Australians leave their money in accumulation accounts and needlessly pay tax on those funds?
One possibility is that they have not received any specialist financial advice. If they had, even the greenest of financial advisers would have identified this unnecessary ‘gift’ to the tax office.
Jeremy Cooper, former chairman of retirement income at Challenger, told The Australian the blunt truth was that most retirees were unaware of the tax implications of leaving their money where it is – and funds have a vested interest in keeping it that way.
“No-one has woken them up to the fact that they can be in the tax-free pension zone, so that’s a problem,” he says.
“Inertia in almost all respects benefits the funds. If members don’t make choices, they don’t ring up the call centres, they leave their money sitting there, that’s all good for the fund.”
In short, by not paying attention to where their money is, many older Australians are paying tax they don’t need to pay and increasing their super fund’s profits.
Mr Cooper says there is also a general reluctance among retirees to move super to any account or product that draws down on the overall capital saved.
Retirees who shift funds to a pension account are required to withdraw a minimum amount each year, starting at 2 per cent and increasing with age. At age 65, a minimum of 5 per cent of the balance must be drawn each financial year.
“The idea that you would spend that nest egg, which is part of the imagery of retirement, is an anathema, particularly as you go up the wealth scale and into the self-managed super fund brigade,” he says.
“They are almost maniacally committed to not spending the capital.”
He says the government’s Retirement Income Covenant (RIC), which came into effect in July 2022, is a good first step towards tackling the problem of many Australians dying with a substantial amount left in their super.
Under the RIC, funds are required to devise and implement a strategy for each member to maximise their expected retirement income while managing longevity risk, investment risk and inflation risk.
Jonathan Philpot, a wealth management partner at HLB Mann Judd, says anyone aged 65 or over who has not started a pension account should contact their fund or seek financial advice.
Are you retired but have super in an accumulation account? Why? Let us know in the comments section below.
Also read: Super fund set to return millions to members after bungle
Investment returns from the accumulation phase are taxed at a flat rate of 15 per cent. Take the money out of super as a pension, and any money you do not spend goes into an investment The return on that investment is taxed at 19 per cent or 32.5 per cent. I know where I want the money, in superannuation. I make withdrawals for big purchases.
Our Super System is not necessarily the envy of all countries.
A couple with a super balance of about $900,000 are better off than a couple with $1,000,000 as the later couple receive NOTHING from this government, must pay in full for health, council house and car rates etc.
They will become poorer each year until they start receiving help from the Govt.
They are not “maniacally committed to not spending the capital” as those just outside the OAP range have no choice and their funds will go down over time. You totally ignore the psychological situation an elderly person would be in with his lifestyle suddenly inverted.
Experience in the industry might help but experience as a SMR might help even more.
That accepted, the annoying part is that many in that area will be living off less than an OAP due to low interest rates or maybe having to risk all learning and playing the Stock Exchange late in life.
Experience in the industry might help but experience as a SMR might help even more.
I’m in the same boat as you Gary and very happy to be there. Jacka.
some weird time travel stuff going on – two replies nine months before the article is published, really?
Brad should provide some worked examples as it is a little more nuanced than this depending on how much surplus funds from pension phase are being talked about and then invested
One of the reasons for this situation may be because the ATO told pensioners to move funds into an accumulation account as they did for me. I was told I had excess in my pension accounts and if I didn’t move it into an accumulation account my pension or part of it would be taxed at a higher rate.
At the time it wasn’t appropriate to buy more shares and interest rates were not attractive.
While the tax might be higher in an accumulation account generally the rates of growth are better than those paid to pension accounts so it probably evens out.