Super Members Council CEO Misha Schubert (left) wants the superannuation system updated to ensure retirees aren’t paying more than they should. (Source: X/Misha Schubert/Getty)
The Australian government is being called on to change superannuation legislation to ensure retirees don’t lose any more money than they should. At the moment, it’s up to each individual to alert their fund when they retire, which transitions their account from accumulation phase to the tax free pension phase.
Surprisingly, data from the Super Members Council (SMC) found there are roughly 700,000 Australians over the age of 65 who aren’t working full-time that still have an accumulation account. Misha Schubert, SMC’s CEO, believes laws should be updated to make this account transition automatic when people hit 65.
“We need to make the shift into retirement so much simpler, easier and more intuitive for everyday Australians,” she said.
“This challenge is now incredibly urgent as almost three million Australians start to race towards retirement in coming years.
“Moving to a system of simpler, smarter pathways into retirement would mean every Australian could retire with confidence, knowing they’re not missing out on money to pay the bills and enjoy life to the fullest.”
Moving from accumulation to pension might sound like a niche technicality, but it has big implications for how the money in the account is taxed.
When a person hits 65, they are free to access their superannuation account, even if they are still working.
But if their account is still listed as being in the accumulation phase, the earnings on the fund are taxed at 15 per cent. This applies to investment earnings including interest, dividends, and capital gains within the fund.
However, if the fund is registered in pension phase, all those earnings are mostly tax-free.
There is a cap, which is currently $1.9 million, which limits how much can be held in the tax-free pension phase. Any money above that reverts back to the 15 per cent rate.
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The SMC found it costs an average fund holder around $650 a year in taxes if they stay in the accumulation phase when they could be in the pension phase.
If someone kept $200,000 in the former phase instead of moving it to a pension account, they could pay up to extra $9,000 over their retirement.
The Council acknowledged that some people over 65 keep their funds in accumulation phase because they are still working.
“However, research shows many people don’t act because they are disengaged or don’t know what to do,” it added.
Super funds are also banned from making suggestions to fund members about what to do with their money, so the onus is on members to seek out this information and make decisions.
This is why hundreds of thousands of accounts could be sitting in the wrong phase because people aren’t aware or don’t know how to proceed.
The number of retirees is set to double, jumping to about 2.8 million people in the next decade.
About a decade ago, 150,000 people would retire each year. But soon this number will jump to 300,000 per year, a trend described as the “silver tsunami”.
SMC’s recent report on retirement and super found the “general complexity” of the system is leading to “decision paralysis”.
To rectify this issue, the Council has proposed the following:
Consider key engagement approaches to members in accumulation over 65
Consider eligible accounts to automatically transition to the retirement phase upon meeting an unrestricted condition of release
Designing special simplified pathways for low-balance members to move into the tax-free retirement phase without needing to navigate complex processes
Exploring other models such as guided transitions supported by digital tools
Ensuring insurance needed by members is not lost
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