Getting a Greater Tax Benefit From Your Superannuation Fund

Reducing the amount of tax paid on investment earnings in your super account could mean more wealth in your retirement nest egg.

Through our working lives, we become accustomed to paying and managing taxes. Whether you do it yourself or engage a professional – your yearly tax return is a familiar process. However, tax paid on our investment earnings by our superannuation fund is not something that is typically front of mind and this is supported by data from the Australian Prudential Regulation Authority (APRA)¹ which shows that as many as half of all Australians over 65 with APRA funds are still in accumulation funds, and thus may be paying too much tax on their superannuation investment earnings. There are, however, opportunities available for many retirees to structure superannuation to improve the tax effectiveness, and this saving may ultimately mean more wealth in your retirement nest egg.

Tax in superannuation

Your superannuation is typically held in one of two types of accounts:

1. Accumulation: Most individuals will start with this type of account. It is where money can be contributed either by employers or via personal contributions. The tax paid on investment earnings in this account is at most 15%, which is less than the lowest marginal tax rate in Australia of 19% provided that you earn more than $18,200 in taxable income).
2. Pension: Once retired and provided the eligibility criteria (below) are met, the balance of the accumulation account can be transferred to a pension account which can then be used to provide a regular income stream (pension). The benefit of having your superannuation in a pension account is that the tax rate on investment earnings is reduced to 0%.

Using a starting super balance of $650,000, the below table illustrates how tax savings can accumulate over time if an account was converted to a pension account, compared to if it were to stay in an accumulation account. The table assumes an earnings rate of 3.5% p.a.* on investments, and all pension income is recontributed to superannuation and invested.

Please note, the above table is for illustrative purposes only and does not constitute advice. The actual outcome will vary based on market movements and your relevant personal circumstances.

*An investment return of 3.5% is based on an Evans and Partners Model Portfolio 5 which targets a return of CPI +3.5%.

Despite these comparatively attractive tax rates, data from the Australian Prudential Regulation Authority (APRA) shows that approximately half of those aged over 65 with an APRA fund are yet to commence a pension and thus, may be losing more of their superannuation earnings to tax than necessary. Some individuals may be ineligible or have opted to retain an accumulation account for legitimate reasons. But for many, this may be a missed opportunity to reduce their superannuation tax bill and ultimately, preserve more of their superannuation earnings for themselves.

Eligibility and timing

The most common trigger points – called conditions of release – for moving superannuation to the tax free pension phase include:

1. Those who have reached their preservation age (for most people that’s age 60) and retire.
2. Individuals who cease an employment arrangement on or after the age of 60 (even if later returning to work).
3. Reaching the age of 65, irrespective of retirement status.

But that’s not all. The generosity of the tax benefits within the superannuation system called for the introduction of a limit on retirement pensions in 2017. This is known as the personal transfer balance cap which is a lifetime cap allowing up to $1.9 million to be transferred to the pension phase.

Other considerations

Before considering a retirement pension to support your lifestyle and improve the tax effectiveness of your superannuation, there are broader impacts that should be built into your planning:

• There is a legislated minimum amount – based on a percentage of your account balance – that must be withdrawn each year. The percentage starts at 4% for those under 65 but increases with age (regardless of whether you need the income).
• Consider the level of liquidity within your superannuation fund to ensure your pension requirements can be met each year without the need to force sell assets at inopportune times.
• Pension balances are also deemed when assessing your eligibility for government benefits such as the Age Pension and the Commonwealth Seniors Health Card (CSHC). If you are likely to be impacted, weigh up the value these Centrelink benefits provide you with the tax and income benefits of commencing a pension.
• If you do not need all the pension income to cover living expenses, you may be eligible to contribute it back into your superannuation fund to help keep your balance growing.
• For those who also receive a defined benefit pension, its ‘special value’ will consume some or all of this cap, making rebalancing strategies with your partner worth considering if it means maximising retirement phase benefits.

Plan ahead

Nobody likes to pay more tax than is necessary. Whether you are approaching retirement or already in retirement, it’s never too late to put the right structure in place. An Evans and Partners financial adviser can help you navigate your options and determine whether a retirement pension is right for you.

¹The data from APRA relates to the Annual superannuation bulletin. The document provides an overview of the superannuation industry, and is published on an annual basis. These statistics contain information on funds and membership profile, key financial performance metrics, financial position, fees and expenses.