Five worst super mistakes
And ways to avoid them
Yes, it’s a challenge to keep up with the ever changing landscape of superannuation. But that shouldn’t result in you making any of these worst super mistakes. Back in the day there was the idea of not tinkering with super for a few years, to give savers and retirees the chance to work within the current rules. Some security of decision-making, if you like.
We’re not sure where that notion went, but right now it seems as though the goals posts are shifting fairly regularly and it is hard to stick to your plans when that course of action might just cost you dearly.
To be fair, some rule changes are occurring as extra legislative support was offered during the height of the Covid-19 pandemic (e.g. in halving super drawdowns), so reversing these changes had to happen sooner or later.
But other changes and external market forces (including rising inflation and volatile investment returns) are forcing many retirees to review their super strategies and refine their settings in order to maximise income.
Today we look at what we believe to be common, avoidable superannuation errors. The more we highlight such mistakes, the more we can support all retirees to review and rethink before taking a misstep.
Here’s the five worst super mistakes , as voted by our team, including Megan, Nicole, Sharon and Steven.
1. Delaying your switch to decumulation.
As we have highlighted previously, at a certain stage you can choose to move from the accumulation phase of super (i.e. contributing to your fund) to the decumulation (or withdrawal) stage. This often coincides with reaching your specific Preservation Age. But often superannuants can drift, not yet willing to convert their super savings from accumulation into a retirement income stream (typically an Account-Based Pension). It’s a highly personal decision, but one with financial costs. Broadly speaking, the earnings on your money in a decumulation (pension phase) account is not taxed. Earnings in money in an accumulation account is taxed at 15%. Being able to reorganise your funds, at no extra cost, could save substantial taxation every year. Could you do this?
2. Withdrawing lump sums and hoping cash investments will keep pace
There’s something very comforting about having a high bank balance. Few of us would knock that back. But believing that funds withdrawn from super are better off in a cash account can be erroneous. Often this is an emotional decision. The money just feels more tangible if you can withdraw it from a bank account tomorrow. And yes, having accessible cash is always a smart way to go. But how much you need in cash is the real question. And post Preservation Age, your super is very accessible as well.
Let’s say your super savings are the median amount for a 64-year-old male ($179,000 ). And as you’re past Preservation Age, you withdraw $150,000 and place it in a term deposit. Over the past financial year, with rising interest rates, you may have done well, and achieved about a 4% return on this money, say $6000 interest. But the financial year-to-date returns on super are sitting at 8.5%. Say $12,750 had your money been left in your fund. It’s a significant difference. And as mentioned in the previous point those super earnings if they are in an Account Based Pension are tax free whereas they are taxable in your bank account. Taking a lump sum is sometimes the best course of action – but it depends entirely upon how you employ those funds.
3. Underestimating your longevity
As we’ve noted before, the longer you live, the longer you are likely to live. So what does this mean when it comes to super? It means that if you are currently 65 and a male, you are likely to live until 85.3 years and if a female, likely to live until 88 years. So at least 20 years is a fair bet. This is a good reminder that you need your savings to continue to work hard so they, too, last the distance.
Being too cautious with investment settings may not be your best strategy. It’s a great reminder, too, that checking what your settings are is always the first step. Many people simply don’t know. Yet this information is available on all good super fund member dashboards, and easily accessed if you are a trustee or director of your own Self-Managed Super Fund (SMSF). This is information you really should know, top of head. Calculating how long your funds will last, and how they might combine with an Age Pension is trickier, to be sure, but that’s why we created the Retirement Essentials Retirement Forecaster, so advisers can help our members better understand the detail of their likely income, entitlements and how their spending will affect combination.
4. Being unaware of useful strategies for older Australians
This is a common error, but a very understandable one. There really are too many rules to wrap your head around. But at least knowing the top level options is a good start. In recent years, governments of all persuasions have acknowledged the need to encourage retirees to maximise their super by offering special contribution rules. This is not just for those in the accumulation phase, but also those who are already retired. We have written about these rules many times, but briefly, some you may wish to learn more about include:
- Carry Forward rules
- Bring Forward rules
- Downsizer contributions
- Younger partner options
Some singles and couples have saved literally tens of thousands of dollars by better understanding these opportunities and using them if relevant to their own situation. It’s important to note that each of the above strategies is specific to your personal circumstances including age, relationship status, savings and retirement goals and clarification on whether these rules are useful to you is a great way to ensure your super is match fit for a long retirement.
5. SMSFs are not for everyone
Being in charge of your own super sounds empowering. For many Australians, establishing a Self-Managed Super Fund has been a very strong foundation to retirement wealth. But SMSFs are not for everyone. Our adviser, Nicole, shared the following story of members who have really been through the mill with their own fund. Let’s call them Michael and Jean.
‘Michael and Jean set up a SMSF on advice from their accountant with $200,000 of super to invest in term deposits. Accounting and auditing fees were $3,500 per annum and even more for the set-up of the fund, back when term deposits were returning around 1.5%. They couldn’t fully invest in term deposits either, as they needed to keep 10% available in cash to satisfy minimum pension requirements for the next two years, otherwise their earnings would be taxed at 15%. Michael is 80 years old and feels totally confused by all the unexpected constraints. He next transferred some money in so he could round the term deposit up to $200,000. But he wasn’t actually eligible to make a contribution! So he would have breached the rules and possibly paid tax at highest maximum tax rate.’
What to learn from this? The takeout is that it’s not wise to set up a SMSF without a lot of money and a serious intention to take responsibility for the regular management of your own investments. There are many different estimates of what ‘a lot’ of money might be, but less than $500,000 is probably too low. Taking specialist advice on whether it is wise to move from a personal fund to managing your own is the best course of action. Often an accountant can help (although Michael’s was not in this category). Creating a spreadsheet of likely earnings and costs is a first step – rather than being shocked by high establishment, management and auditing fees after the event.
Managing your super well is a crucial part of your retirement journey and assisting you to do this is our specialty. Learn more about the rules that might matter most to you in our tailored Understanding Super consultations.
What’s your ‘super’ status?
Have you ever made one of these worst super mistakes?
Or have you managed to maximise your super savings along the way? If so, how?
We’d love to hear your views and questions.