The latest research into the number of retirees in Australia, according to the Australian Bureau of Statistics, confirms that there are now more than four million. But as numbers increase, so do the many definitions of retirement. Some of these so-called retirees are still working part-time and others do ad hoc project work.
Where the retirement ‘status’ gets very confusing is when it comes to your super.
Aaron Minney, head of retirement research at annuity provider Challenger, tells us that about 1.3 million super accounts held by those aged over 65 are still in accumulation mode. He suggests, based upon information from the Australian Prudential Regulation Authority, that the value of this ‘pot’ of savings is about $225 billion. These accounts still pay tax on earnings.
It seems that the old concept of an accumulation account being held by someone working and saving, and an account in ‘spending’ or ‘drawdown’ phase as one held by retirees, is no longer the case.
Does it really matter? Well it can if you are being penalised unawares by paying too much tax.
How does this work?
Let’s take the example of a couple who have reached their Preservation Age – let’s call them Anne and Michael – and say they are 64 and 66 respectively. Anne has $170,000 in super, Michael has $250,000, totalling $420,000 as a couple.
They both still work and live off their employment income. As their accounts are both still in accumulation mode, they are paying 15% on super earnings, which were 9% over the past financial year.
This means their earnings of $37,800 for the year was taxed at 15%, or $5670. Had these accounts been switched to an account based pension, they would have paid no tax on the earnings. They would have had an extra $5,670 in their account rather than in the tax office coffers.
It’s often the case that this impost goes unnoticed as the tax is paid out of your super, so unless you are reading your annual statement, you could well be unaware of the tax take and just note the net earnings for the year.
This example of Anne and Michael is illustrative only, and not used as a reason to suggest you should change from accumulation to an account based pension. Tax is just one factor and there are many reasons why you would or would not do this. If you are unsure, it could be helpful to book a superannuation consultation, as it is a major financial decision and you will need to take all of your circumstances into account.
Pros and cons of switching to spending phase
We asked Aaron why so many accounts held by over-65s are still paying tax. He responded:
‘It’s important to remember in the system of super we have had 40 years where people have been told to save, save, save. Now we’re asking them to spend – it’s hard for them to turn.’
There are a few different reasons why people don’t switch. One is that they are simply unaware that this change has the benefit of reducing taxes.
Another reason is that some people think because they are still working, they are not allowed to change to decumulation mode until they fully retire. This is not correct for everyone. One of our Understanding Super consultations can help you understand these rules better.
Others may feel that switching to the drawdown mode means that they will run out of money. As we’ve mentioned before, the safety net of Australia’s Age Pension means this technically can’t happen. But spending too quickly may be a reasonable concern and the mandatory annual withdrawals from super in drawdown mode mean a certain amount of money must leave that account every year. (This is not to say that you couldn’t recontribute these funds if that was your preference.)
There is also another, often overlooked reason why you may choose to keep your super in accumulation, and that is if you are receiving Jobseeker assistance. While your account is in accumulation it is not counted towards the income and assets tests for your benefit. Should you start to receive a super pension, then it will be assessed as an income stream. If your work has been stop-start and you feel that Jobseeker is an important part of your future income, then moving to drawdown phase could well affect this source of income.
And then there is the sometimes confusing ‘younger partner’ ruling whereby an older partner who has started drawing an income stream from their super may be entitled to a higher Age Pension, based upon the assets tests. This increase might be achieved by moving some of their super to the accumulation account of the younger partner. But if this younger partner has already switched their account to decumulation their super will be counted. The loss of extra entitlement could be higher than the gain made in saving on 15% tax by the younger partner. The ‘younger partner’ strategy can be complex, so it’s important you know all the detail of this option if you feel it might work for you and your partner.
Yes, moving from accumulation to decumulation can be tricky – and it’s often a lot more nuanced than those who urge you to do so to save tax realise. As with all retirement income decisions, there are very real trade-offs that need to be made. Aaron suggests a good starting point is to try to think of your super as your ‘pay packet’ rather than a nest egg that can’t be touched.
If you would like to discuss how this change in super status might be of benefit, our experienced advisers are keen to join you in a consultation where you can compare options and test your decisions about your super.
Did you realise the difference in taxation treatment for funds in drawdown mode?
Not everybody does.
Is this an important factor that needs to be highlighted?
This article is provided by Retirement Essentials Representative Number: 001260855. We are an authorised representative of SuperEd Pty Ltd ABN 88 118 480 907 AFSL #468859. This information is not intended as financial product advice, legal advice or taxation advice. It does not take into account your personal situation, goals or needs and you should assess your own financial situation, consider if the information is suitable for you and ensure you read the relevant Product Disclosure Statement (PDS) if you choose to make any changes to your financial situation. It is always advisable to consult a financial adviser before making financial decisions.