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 But believing that funds withdrawn from super are better off in a cash account can be erroneous.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.
I have my superannuation with a financial adviser and its spread across various shares and proprty trusts.
I think that fees are possibly high. should I consider shifting back to an industry fund with lower fees. my super is around 250K
Hi Christine, Thanks for reaching out. It can be tough to know if you are in the best product for you. Low fees don’t always been better, but over the long term these things can make a difference. MoneySmart has a website that provides some useful tips on how to go about comparing super funds and what to look out for, and also includes a link to the ATO super comparison tool. You can access the website here. Best of luck!
Yep; in most cases an industry fund will give better growth etc. Witness the Hayne royal commission after which many fled the retail and bank and went to industry funds.
Just wondering.
If my funds are in a fixed term bank account, the deposit is guaranteed by the government up to $2500000. In super you are at risk to the stock market which is a lottery.
Am I correct?
Trevor
Hi Trevor, thanks for sharing your thoughts! You are correct in that there is no Government backed guarantee for super funds like there is with banks however it should be noted that when investing with super there are options other then just shares if the volatility of share markets is your primary concern.
Hi Trevor and Steven
Also note that super members funds held in the ‘cash’ option of all Oz Super Funds is not covered by the Government $250K guarantee (as its only the actual Super Fund that has this guarantee, in theory for just $250K, even though they may hold Billions of members $’s in term deposits!). Not many people realise this fact. If you don’t believe this contact your Super fund and ask this question (as I have done and they confirmed). In my opinion, having a SMSF with multiple term deposits of <$250K deposited in different banks (i.e. Authorised Deposit-Taking Institution – ADI’s) is the safest option for a conservative investment strategy.
Hi Trevor and Steven
I also wonder if the super funds not having the $250000 government guarantee of the banks are at risk if there is a war or from Cyber crime as we have seen some huge companies experiencing cyber attacks.
Hey there. this is really helpful stuff. is there any way that I can get advice re my super, changing to an income stream? my present so called advisor is almost always unavailable or says to wait and don’t stress!!!?
Hi Heather, thanks for the feedback. We love to hear that our information has been helpful! If you are considering an income stream for retirement then I can help to work through the options with you, as well as weighing up the pros and the cons of different retirement income choices. We offer a couple of types of advice services and you can choose the one best for you, but I would recommend a Strategy Consultation to address your specific question. You can learn more about our services here.
Hi my wife and I receive the full aged pension each
My wife is aged 61 and receives the full aged pension because I receive a Veterans Affairs TPI disability pension
My wife will shortly receive an inheritance of approximately $300,000 from her mothers estate .She intends to deposit this amount into her current accumulation super account to avoid the assets and income test as we are close to the limit
I understand that she will be taxed 15% on the annual earnings but is the tax also payable on the the $300,000 deposit into her super account
Hi George thank you for seeking our guidance! My condolences at the passing of your mother-in-law. What you are suggesting would likely count as a non-concessional contribution that would trigger the bring-forward rule which means no, there would be no tax on the deposit. To be certain your wife should speak with her superannuation provider.
I thought Super was included in the Assets test?
Hi Karen, good spot-checking! If both people are over Age Pension age then yes all super is assessable however if your partner is under age AND their super is in accumulation still (as George alluded to) then it is exempt from the assets test.
I fear I have made one of these mistakes. Given the talk of global and National recession, and having been through the GFC and two recessions already, I moved the majority of my small super into a bank savings account where funds are guaranteed. I understand that if I move it back to super I will be taxed a further 15 percent contributions tax and if I leave it in the bank savings account I’ll be taxed on the interest. Do I have any other options?
Hi Marcia, it’s Sharon here, thanks for your question. This can appear concerning for some people. The good news is that your money doesn’t need to remain in the bank savings account.
Moving the money back into super will not need to be taxed a further 15 percent contributions tax. There are several types of superannuation contributions. The one that is taxed 15% contributions tax is called a concessional contribution. There’s also one using after-tax money (eg money in a bank account) called non-concessional contributions. These are not taxed, as they use money which has already been taxed (using after-tax money).
Contribution caps apply to both of these types of super contributions, there are a few tips and traps we can go through with you, if you would like to discuss this further with us in a consultation to ensure you know whether you comply within the existing rules. I would be very happy to help you understand your options if you wish to book a personalised consultation here
I am 66 Yrs old.
Husband is 76 soon.
We have lost lots of money over the years due to bad judgment and saving.
We have both withdrawn most of our Super savings to buy a home for us to live in, we have not other savings OR investments in properties, shares or any other assets.
Husband is still working with little wage and I work 3 days per week, we are not receiving any income assistance from our government as yet.
Have we done the right thing in buying a home for us mortgage free and with very little money in our super accounts?
Please advise!
Hi Marie, it’s Sharon here, you have done well to buy your own home mortgage free. Everyone’s circumstances are different and we all do the best we can. It sounds like you are both making the best use of the opportunity to earn a little more to increase your nest egg before retiring. It’s hard to say if you’ve done the right thing, but you will know that, if buying your own home provides you peace of mind for your retirement years. It’s not always about money. Peace of mind can be hard to measure. If you are wanting to know how much you can safely spend during your retirement years to avoid running out of money, I would be happy to help using our retirement forecasting tool if you would like a strategy consultation with me, which can be booked here if you prefer.
One of the advantages of converting super into an account based income stream as always highlighted is that all the earnings are tax free under pension mode. Yes I wholly heartedly agree with this but there is a tradeoff as the income stream will be considered as income in the eyes of the ATO unless I am wrong.
Assuming drawing down an income stream of $5000 a month for a reasonable lifestyle, this equates to $60,000 per annum attracting a tax liability of about $9K.
Am I right in saying this?
Hi Hon, thank you for sharing your thoughts! What you have said is not quite correct. Generally speaking the ATO do not count the draw downs as income and tax them. There are some niche exceptions where some tax may be applied but for the majority of people they would not pay tax on the draw downs.
Lifetime pension products, specifically Q’super. I see no mention of these products but the advantage of being able to reduce your asetts and increase your pension while not outliving your funds is obvious. We did purchase a lifetime pension and got a 450% raise in our part pension, we only spent a portion of our super funds to acheive this. Advisers don’t promote this strategy as there is no commission for them, l wonder.
I suspect this is about to change. In Australian Financial Review from 26 Aug 2023 there is an article re annuities. The treasurer is urging the Super funds to offer more products like the lifetime pension by Qsuper. The concern is that retirees are either outliving their super savings or don’t spend enough.
If a couple with approximately $1m in super were to spend 500k to move to a more expensive house they would then be eligible for almost the full pension of 40k a year. That is about 8% on the 500k plus the appreciation of the more expensive house. You also do not have to worry about the volatility of the stock market or interest rates.
We could quite easily live on 500k super and 40k a year aged pension for 20 years.
Is this a good strategy?
Hi Peter, that’s a good question. There is no straight answer as everyone has differing views on their retirement goals and investment preferences. You are correct in referring to assets used to purchase your house are not counted, as the home you live in is considered an exempt asset for Centrelink purposes. There are pros and cons so it’s not always a good strategy. It can depend on whether you want access to liquid capital, for healthcare or other needs, as your example here ties a lot of capital up in the family home. Unless you plan to sell and move again, this idea might not suit everyone. We offer a few advice meeting options which can help people decide which pathway might be best for their needs. These can be booked here
Hi,
I have $190,000 in a choice account. Now that the minimum withdrawal is going up it will probably affect our full pension. Would it be worth putting some of the money in a term deposit so that the income wouldn’t we get from the account would go back down.
Thanks
Lesley
Hi Lesley, you are correct, there are changes in the minimum withdrawal rate increasing. However any income streams which commenced after 1st January 2015 are assessed by Centrelink using the ‘Deeming’ rates, which is exactly the same as all financial assets, including term deposits. This means there may be no difference whether the balance is in a term deposit or in a choice account, provided the income stream commenced after 1st Jan 2015.
I have SMSF in pension mode since 2017. I invested in all shares, which are paying high dividend and fully franked. After admin fees ($3600) and compulsory withdrawal, my super has grown by 24%. These shares are usually very stable and don’t require watching too much. Investment must be spread e.g. Finance (banks), Retail(HVN), resources (BHP, FMG), Gold etc. I am not a financial adviser, just ordinary accountant, but want to share how to make it easier for my Aussie family.
you say that money in super is not taxed but in a bank account it is…… other articles you have provided say they are deemed… what’s the difference?
Hi, this is a good question, there can be a lot of jargon out there. Let me explain. Deeming is the way Centrelink treats any assessable financial assets (such as term deposits, shares, money in your bank accounts, and superannuation balances). They use an ‘assumed rate of return’ which is an annual percentage rate, and divide that annual result by 26 to arrive at a fortnightly figure, which is used as the investment income figure in the Income Test.
The ACTUAL amount of investment income doesn’t matter, and nor does the amount of your ACTUAL superannuation pension payments which is paid into your bank account. All financial investments are ‘Deemed’. You are therefore better off then if your investments provide a higher investment return than the ‘Deeming’ rate.
Tax is a different issue altogether. Money in a bank account earns interest which is taxed, as it always has been. Money in super can be taxed, depending on your age and whether you commence an income stream. These are options available to you. We can help you cut through the jargon to discuss your own scenarios if you would like to book a consultation with us here
Hi, I have an accumulation account $312,000 and retirement income $199,000 account with industry super. I have kept two accounts so the minimum withdrawal set by govt is only approx $9000 a year from retirement income account. Rather than $25000 a year. Is this still wise as mentioned above having two accounts extra fees.
Hi Margaret, it is no longer a requirement to commence an income stream like it once was. There are pros and cons of keeping super in accumulation phase. First as you mention, the minimum withdrawal rate for you would be lower, as there is no need to draw a minimum from accumulation accounts. The flip side is that accumulation phase continues to attract 15% tax rate on investment earnings, and if your super fund has fees per account (as opposed to a balance percentage), then you may be paying two account fees. We can discuss your options of what it would look like for you being in super accumulation vs income stream pension, if you would like to book a consultation with us here
I am 65 and retired with a small defined benefits pension $8,000pa, most of my income comes from dividends in my share portfolio ($700,000). I have the opportunity to sell some of these and put the money into a super fund (from recent work) at Australian Super as a non-concessional contribution up to $330,000. Would this be of greater benefit to me.
Hi Kimberley, well done taking a proactive look at your options and seeing if you can make your money work as hard as you! As with most investment options there are pros/cons that you would need to weigh up so that you are confident you are making the best decision for you. It’s rarely a case of one option/plan fits all. We can talk you through the ups and downs of each option so you feel confident in whichever decision you make. To book a session with our specialists please CLICK HERE.
I am a 65 yo female , (past preservation age) still working full time and withdrew $150,000 from my super to pay off my mortgage in Dec 2022. My accountant thinks I will have to pay tax on the $150,000 – My superannuation company never answer the question when i ask them whether i have to pay tax on it, and just say it wasn’t taxed leaving the fund. The ATO, just point me to their website which is written in a language i don’t understand. Will i have to pay tax on the $150,000 i withdrew?
Thanks Vonnie
Hi Vonnie, thanks for seeking clarity! It is most likely that you will not pay tax on the withdrawn amount but technically it can happen. Super is comprised of 3 components, tax-free, taxed (EG SG, 15% on earnings and personal contributions) and an untaxed component. If the withdrawal came from the untaxed component then yes you will pay tax on it now. Having said that, untaxed elements are rare which is why you most likely will be fine. Perhaps you could call your super company and instead ask them whether you have an untaxed component or not? If you don’t, then no need to worry, if you do, ask them if the withdrawal had an untaxed component or not.
I am 70 years old and still working full time. I believe my superannuation is unrestricted and unpreserved. I am aware that I pay 15% tax on my employer contributions, but having read answers to other questions, I am not sure if the earnings on my super account are taxed also.
Can you clarify for me please.
Hi Doug, I’m Sharon and I’m happy to explain. Anyone who has super which had 15% contributions tax come out of their employer contributions, is able to access their super tax-free from age 60, once they meet a ‘condition of release’ to access their super.
Reaching age 65 is one of the many ‘conditions of release’, so irrespective of your work status, you can now access your super which is why it is unrestricted, and it will be tax-free from what you have described.
Earnings on your super balance is a different issue. If your super remains in ‘accumulation phase’, your investment earnings are taxed at up to 15%. If your super balance commences an income stream upon permanent retirement or after reaching age 65 (whichever occurs first), commonly called an Account Based Pension, this has no tax on the earnings or capital gains.
There are pros and cons of both options, as while there is no tax in pension mode, there is no requirement to draw a minimum amount out each year in accumulation accounts, like there is in pension mode.
I can help you understand the best option for you in one of our Strategy Consultation meetings, where we use our retirement forecasting tool to model projections for your retirement years, to compare the two scenarios. If you would like to book one of these meetings with me, these Strategy Consultations can be booked here
I have been told that I will need to convert my super from accumulation phase to an income stream when I turn 70 is this the case?. Also once your super is converted to a pension stream if you die does the super fund keep the balance of funds or are they returned to your estate to distribute as per your will?
Many thanks for your awesome site
Hi Jill, it’s Sharon here. That’s a great question. It used to be the case that an income stream needed to be commenced, but that requirement has been abolished several years ago. You can now choose if you want to keep your super balance in accumulation phase, or commence an income stream. There are pros and cons for both, but for people who don’t want to be forced to withdraw a minimum amount out each year, you can choose to remain in accumulation phase. I am happy to help you with comparisons of your options if you wish to book a Strategy Consultation meeting with me, which can be booked here
When you die your funds are not retained by the super fund. They also don’t have to be returned to your estate. But they can be. Let me explain.
A death benefit is paid by the super fund of the total of your super balance, plus any insurance inside your super fund. The question is, where is it paid to?
Superannuation is a ‘non-estate asset’ meaning it bypasses your estate, unless you want it to be directed to your estate, to be distributed as per your will, as you mentioned.
The option is available to bypass your estate, which can be beneficial for anyone concerned about their will being challenged, for example.
Contact your super fund, and ask them for a Beneficiary Nomination form. This is a legal document completed and signed by you, which tells the superannuation fund trustee who you want to leave your superannuation death benefit to. In the absence of this written instruction, the super fund trustee would have discretion who to leave your super balance to. There are also tax implications on who can receive the funds tax-free, which may help you decide who to leave it to.
I have a TTR and will be retiring in few months at the age of 64.
Returns(from super) this year sit on 8.5% and while my super has made me lots of money I have taken the conservative path this time due to my age and earn 5.5%.
Once retired I will be withdrawing a very large amount of my super placing it in an offset account for my investment property loan.This will earn 6.30%(current interest rate and going up) which I would have had to pay and will leave me with the $55k annual rent.The balance will be placed in a pension mode ,no tax on earnings including no tax from the rent thanks to negative gearing.
On a later day when things settle and property values go up and hopefully rates down I will be placing money back to super …that also will save my children from paying any death tax and this is quite a bit of money.
Although I worked hard for 41 years and paid lots of tax I will not be getting any pension….. but that is ok.
This is the path I have taken and hope it will work.
My wife and I became unemployed 9 months ago. We are considering should we retire I am 66 and my wife is 56. My wife has found casual work recently. We own our house, no debt .A term deposit of 200 K and 45K in savings accounts. We have been living off our savings account .As my super advisor has told us to live off our cash during this time and run our savings down into the future ,before using my super.He also feels it is stupid of us to have this term deposi .He tells me now is not the time to touch my super. My wife has 400K in an Industry super fund and i 750K in a fund .My advisor is against my taking an income stream or a lump some a couple of times a year. We feel we could live on 65K.We have a caravan and would like to do a bit of touring .We realize we will not get any pension. My super is just sitting their in accumulation
Any advice would be helpful and appreciated .
Alan
Hi Alan, it’s Sharon here, you have done a great job in accumulating a nest egg for your retirement! We applaud customers who look ahead to plan for their retirement, and want to show you how to look forward to your retirement. Having your caravan to do a bit of touring sounds like something you enjoy and if you consider you can live off $65K pa we can do some modelling for you. This can help you with your forward-planning, as we use our retirement forecasting tool to project how much you can safely spend each year to avoid running out of money. This is based on projections which factor in your preferred retirement expenses per annum, your starting balance, any additional lump sums you wish to add/substract throughout your retirement years such as travel, car upgrades, etc, along with factoring in super fund fees, tax and inflation. This may provide you with the peace of mind regarding how your current position could support you throughout your retirement years. These are personalised bookings, and I would be happy to help you in one of these meetings. If this is something you wish to do, these bookings for our Strategy Consultations can be made here
Best information.
Need to do something about (particularly govt) employers who insist that temporary staff must be ‘contractors’ even if they have precisely the same job description as permanent staff on relevant awards
There is often provision in the awards for temporary contracts. This allows employees who may for personal or other reasons need to keep to short term work to accumulate super. The “self employed” limit of $27K is risibly low, particularly for those of us who followed the older advice – probably current again! – of paying for one’s home then accumulating super, and particularly for women – not me, TG – who have little super or capital after a divorce.
If an award is available, then it must be offered – I suppose there could be a limit of say, a month, but if its more than that the employee should get super.
Hi. My problem is whether to change my super from accumulation phase to pension. I am 60 and retired and my wife is 58 and will continue to work 3 days a week for some time. We have enough cash, shares and property to not have to access the pension phase for many years. Accumulation phase or pension???
Hi Michael, it’s Sharon here, you ask a great question. There are always pros and cons to these scenarios, as payments from your super are tax-free, but the remaining balance has tax on investment earnings if it remains in accumulation phase. If you change your super from accumulation phase to pension, there is no tax on investment earnings, but you are required to draw out a minimum percentage balance each year, which increases over time. We have comparison tools with our Retirement Forecasting tool that we can run for you, so you can have more confidence about which option is best for your retirement years. Using this tool we can show you how much you can safely spend each year to avoid running out of money, and we can run a comparison of super vs pension for you. I’d be happy to help you with your query if you would like a tailored appointment with me, with a report emailed to you after the meeting. Bookings for these Strategy Consultations with me can be booked here.