What is a retirement bonus?

What is a retirement bonus?

How can you qualify?

The topic of retirement ‘bonuses’ comes up a lot. It’s one that can also cause a great deal of confusion, which probably comes back to the use of the term ‘bonus’. Receiving a bonus at work usually means you’ve done something extra so you get a reward. That’s not how it works with super fund ‘bonuses’ though. Today we have a short explainer on the way these bonuses actually work. So read on for the what, why, who, when and how of retirement bonuses.

What are retirement bonuses?

Also called retirement ‘rewards’ and ‘balance boosters’, this type of bonus is a form of ‘tax refund’. It is a refund on money that funds have set aside to cover tax on potential capital gain liabilities. When members move from the accumulation (saving) phase of super to the decumulation (spending) phase, some super funds return an amount that acknowledges the member has no further tax liabilities on their decumulation account. Not every fund does this.

According to Joshua Lowen, Insights Manager at SuperRatings, about 30% of mainstream industry and retail funds do so. You should check with your super fund as to whether they pay the bonus.

Why are these bonuses paid by some funds but not others?

Attracting and retaining members is a challenge for many super funds. The retirement bonus is one way of differentiating from the competition. It is predicted that more funds will start to offer this payment, with at least another two due to be launched in the next 12 months. As well as a way of competing with other similar funds, such bonuses may discourage people from establishing a Self-Managed Super Fund (SMSF) to access ways of reducing CGT. 

Which members receive these bonuses? 

Moving your money from accumulation to decumulation will trigger this bonus. But different funds use different methods to calculate the actual bonus amount. These methods include:

• An individual calculation based upon your investments, whether you’ve changed investment options and how long you have been a member
• A flat percentage of your investments within your fund (which includes some options, but not others such as cash)
• A mixed percentage on your balance which can change depending upon the different investment options

When is the bonus calculated and paid?

According to Joshua Lowen, most funds will include the bonus amount from day one in your new decumulation account (i.e. the one that pays your retirement income stream). The specifics of a particular fund’s bonus calculations and payments are outlined in that fund’s Product Disclosure Statement (PDS). 

How much do people usually receive?

As the bonus is a percentage of your super balance, it depends entirely on this balance. It’s normal for funds to pay about 0.5% of your balance as a retirement bonus, with caps applying for those with high balances. For instance, the Australian Retirement Trust cap is $9500 which is the lifetime limit on the total bonus amount you can get, based upon 0.5% x the general Transfer Balance Cap (TBC) of $1.9 million.

Are there any restrictions?

Yes, as you would expect, the devil is in the detail. Across the 16 funds currently offering these bonuses, there are two main restrictions which may apply. The first is a minimum membership period. The second is a ‘clawback’ period which means you must stay in that fund for a specific period of time after the bonus has been paid. Funds also have varying allowable withdrawal amounts across time spans of 6-12 months.

It’s helpful, too, to remember that these bonuses are not contributions, so contribution caps do not apply. But they are viewed as contributions towards your total Transfer Balance Cap (or total transferrable super) of $1.9 million. 

What’s in it for you?

Choosing a super fund involves careful consideration of many factors, including fees, performance, asset allocation, the nature of the investments, support and guidance on offer and ease of dealing with the fund. These factors are all important. Some might matter more to you than others. 

Deciding to move from accumulation to the phase when you will withdraw your super is a major turning point. As we’ve covered previously, such decisions are usually influenced by work availability, super balances, private savings, debt levels, health and family needs – the whole enchilada.

This means that the decision to shift from accumulation to decumulation will ideally be a carefully planned and timed move designed to meet your full retirement journey income needs. 

So shifting funds to grab a bonus may not be the best plan. The bonus is likely to be 0.5% of your balance. If this is, say, the median female amount of $203,000, this would be about $1015 in bonus rewards. Is this really enough to change funds? You would also need to commit to staying with your new fund and ensuring that your withdrawals are within its limits, or this amount could easily be clawed back.

As Joshua Lowen notes, 

‘The upside of retirement bonuses is the higher starting balance in your ABP or retirement income stream. There is no direct downside as your bonus comes from money that funds have set aside for the CGT, that you won’t need to pay as a member when you move from accumulation to spending your super. But if the fund which pays a retirement bonus is not right for you in other ways, then that is hardly grounds to make a change.’ 

Need some support with making decisions about super?

Retirement bonuses are attractive, but far from the whole story when it comes to managing your super over the long haul. If you would like to better understand your super – including timing the move from saving to withdrawing funds – then a tailored consultation with an experienced Retirement Essentials planner is a great start.

Have you heard about retirement bonuses? 

Would this payment be enough to make you consider changing funds?