Retirees could lose thousands of dollars over their golden years by not making a change to their superannuation account, a policy advocacy group says.
The Super Members Council estimates that about 700,000 Australians who are over 65 and no longer working full-time have their accounts in an accumulation phase.
Investments in there are typically taxed at 15 per cent, and the Super Members Council estimates retirees could be paying an extra $650 a year in taxes on average by leaving them in this state.
But it says that tax bill can be minimised by moving their super to a tax-free pension account.
Mardy Chiah, an associate professor of finance at the University of Newcastle, said eligible retirees could consider a pension account to save on taxes.
Who is eligible for an account based pension?
Chiah said you must first meet conditions of release to qualify for the tax-free scheme. These can include:
- Reaching preservation age and retiring. Preservation age is the minimum age at which you can access your super, ranging from 60 to 65, depending on your birth date. After reaching your preservation age, you must retire with no intention of returning to full-time or part-time work.
- Reaching age 65. Once you are 65 years old, you can access your superannuation without any restrictions, regardless of your employment status.
- Permanent incapacity. If you're permanently unable to work due to a physical or mental condition, you may access your super.
- A diagnosis of a terminal illness with a life expectancy of less than 24 months.
"Once you confirm your eligibility above, contact your super fund provider of your intent to commence a retirement income stream. They will provide the necessary forms and guidance," Chiah said.
What are the benefits of an account based pension?
The savings from a pension account can add up significantly Chiah said, highlighting three main benefits.
"First, you can enjoy tax-free investment earnings. This is because investment earnings in the retirement phase are tax-free, whereas they are taxed at 15 per cent during the accumulation phase," he said.
"Second, you can enjoy tax-free withdrawals if you are aged 60 and over. Withdrawals from a taxed super fund (which most funds are) are in the form of pensions or lump sums.
"Third, establishing an account-based pension provides a steady income during retirement, with the flexibility to adjust payment amounts within set limits."
Read the terms and conditions
But there are strings attached to the tax-free pension accounts, as financial adviser Mark Rattigan explained to SBS News.
"The requirement of an account-based pension is that you draw a minimum pension each year based on your age," Rattigan said.
That starts at 4 per cent before age 65, increasing to 5 per cent until 75 and higher levels from age 75 plus.
"Typically, there shouldn’t be any hidden costs as exit fees were removed in previous legislation, but it is always important to get advice or read the product disclosure statement," he said.
"For some government employees there are legacy super funds with different rules such as defined benefit funds and untaxed funds that are more complex and will have decisions to make or tax to pay on exit."
Rattigan added that you don’t have to rollover the full amount so you can maintain your super account if you are still working or planning to contribute.
Tax-free investing
Making the most of the tax-fee environment doesn’t remove your ability to keep investing.
"Given superannuation gives you the ability to invest your money in a tax-free pension environment it usually does not make sense to withdraw your money to invest elsewhere," Rattigan said.
"Most super funds have a range of investment options that you can choose from including cash and term deposits so investing outside is not necessary.
"Having said that each individual has a tax-free threshold with tax offsets available to them in retirement so they can earn a good level of income outside of the tax-free pension without paying tax.
"However, keeping the money inside super helps protect against paying tax on earnings if you receive an inheritance or you receive the Age Pension which is a taxable income and therefore counts towards your tax-free threshold."
Where should you go for advice?
Chiah said that financial and tax literacy are increasingly crucial to managing superannuation.
"Given the complexities of superannuation and taxation, consulting with a financial adviser or tax professional can provide personalised guidance tailored to your circumstances," he said.
"Superannuation regulations can change over time (e.g. changes to minimum withdrawals, tax rate, preservation age, etc). Regularly review updates from official sources like the Australian Taxation Office or Moneysmart by Australian Securities and Investments Commission to ensure that you are up to date."
The information in this article is general in nature and is not intended as financial advice. You you should consult with a licensed professional to make the decisions that are right for you.
