Too many retirees miss out on this valuable super fund benefit

Some people are just greedy we are blessed in this country. Just be happy if you have more than a million in super you should be quite satisfied.

As a self funded retiree for the period of Aged 60 - 65 years of age, I left a small component in the Super Accumulation phase to keep life & total permanent disability insurance plus funeral expense cover in place. Tax, Fees and premiums were minimal. After 65 when the protections lapse within Super it’s fine to use those funds to convert to another allocated pension account. My wife being 3 years younger than myself will mean as I approach pensionable age I’ll use funds in the allocated income stream to top up her Super Accumulation Account to allow some access to the Aged Pension for those 36 months.

If a retiree is eligible for a Commonwealth Seniors Health Card, the amount held in pension accounts is assessed under the deeming rules. My understanding is that amounts held in accumulation accounts are not subject to same deeming rules. That could be another reason for retirees commuting pension balances into their accumulation account.

We don't know how long we will live and would prefer to make withdrawals as required. We do not want to be, for example, having to withdraw set amounts during a deep recession or depression in an inflationary environment which is possible. Once withdrawn, we can't recontribute over age 75. Leave us alone and stop assuming we are stupid or need government 'help'. We have had enough changes. In fact I think future generations won't want to contribute to super at all, because of the constantly changing rules. A young person would be better off buying their own home than investing in superannuation when you consider the constantly changing landscape over the last 40-50 years.

Totally agree with everything you said.
Also, there is the compulsory withdrawal percentage that must be taken from a pension account each year. I have worked out that reinvesting the withdrawn amount and paying tax on the earnings is sub-optimal than paying 15% tax.

As said above: stop thinking retirees are stupid and need government “help”.

I have a DB Pension that covers my needs when combined with share dividends. I don't need extra from my Accumulation account, so why transfer to Pension Phase and withdraw it? What do I do with those funds? I cannot recontribute to Super as I have reached the $1.6M cap due to the DB pension being notionally assessed as a balance counting towards the Cap. I don't think I am the only one in this situation.

If your DB pension is such that you have already reached your $1.6M cap, you cannot transfer anymore from accumulation into pension phase. That’s what the Transfer Balance Cap (TBC) means. No one can have more than the TBC in pension phase when they start their pension, and that may have implications for your spouse if they inherit your pension on your death. Secondly, it also means that you also have reached your Total Super Balance Cap and that means you cannot make any more non-concessional (after-tax) contributions to your accumulation fund. You can of course make concessional (tax deductible) contributions (employer SG, and salary sacrifice) but you need to be working for that. If you still had some headroom under the Total Super Balance Cap, you could contribute to super until age 75 (starting 1 July) and the Downsizer contribution doesn’t count.

I can appreciate this situation. Not dissimilar to my own. My thoughts are to look at withdrawing from an accumulation account and recontribute to a spouse account. If an option. Given most spouses have smaller balances etc, and therefore cap space.

My head spins off, reading this article and the comments, So complex for an average Joe!

My question is shouldn't this be a simple, straight forward and tax payer friendly?
Why so many complex rules? What is the genuine purpose for making it so complex?

Keep straightforward taxation and rules for pension on retirement, for god sake it's retirement!

"Why so many complex rules?": Due to most workers not able or not willing to save for retirement without government commanded Superannuation Guarantee and due to government commitment to Age Pension only for those not able or not willing to save enough for retirement. Ideally, all citizens have the means and willingness to save and invest for their own retirement without government prodding or interference.

If over 65 and still working can we put our superannuation into pension phase without having to stop work?. This will negate any capital gains tax within super. Is this correct?

Perhaps laws need to be changed so that contributions can be made into the Super pension account

The tax on death benefits is calculated by applying a tax of 15% + Medicare to the proportion of the remaining capital in the fund that is derived from concessional (pre-tax) contributions. If the death benefit is an insurance payment, the tax is 30% + Medicare.
In a pension fund, that proportion is set at the start of the pension and is frozen for the life of the pension. Any new contributions would change that proportion.
In an accumulation fund, that proportion keeps changing as the fund earnings are continually added to the concessional portion of the fund. The longer an accumulation fund continues, the higher the death tax on the remaining capital.
Of course, if you are over 60 you can withdraw all of your super tax-free at any time and avoid the death tax altogether, but timing that can be tricky unless you have a terminal illness.

Clearly, the accumulation account , for the most part, is intended to accumulate funds in the pre retirement (employment) phase.

Also, clearly this is not generally being followed. The complexities (especially switching for other reasons) needs to be reviewed and simplified for the average person.

Furthermore, Pension accounts need to be reviewed including minimum withdrawal limits.

This may be, for no other reason, that our life expectancies have largely changed over time, since it’s initial imposition.

Personally, I prefer to control my own money rather than an external body (with its now obsolete and outdated processes) forcing me to withdraw certain pensions (cookey cutter and or on size fits all mentality).

Much juggling and complexities could be avoided if compulsory pension withdrawals could be simply abolished altogether.

The overriding principal should always be KISS. It it is far from this at present.

It is presently “screeming out” for reasonable, over due and timely amendments.

1. If the minimum withdrawal from your pension account exceeds your income needs, you can simply contribute the excess into an accumulation account (as long as that contribution is less than the non-concessional contribution cap of $110k p.a.). This can be done up to age 75 from 1 July 2022.
2. Whilst money can't be added to an existing pension account, it is quite simple to create a new (additional) pension account to accept a contribution to the pension 'phase'.

"contribute the excess into an accumulation account":

More tax efficient to keep in Personal Account where personal marginal tax rate = 0%. Where personal marginal tax rate >= 19% then re-contribution to Super Accumulation Account with tax rate 10% to 15% is more tax efficient.

"create a new (additional) pension account":

Ceasing an old 'pension' and commencing a new 'pension' is permitted. Multiple 'pensions' avoided:
. Cease and commute Super Withdrawable ( 'pension' ) Account adding balance to Super Accumulation Account balance.
. Contribute 'excess' to Super Accumulation Account.
. Commute some or all of the Super Accumulation Account balance to Super Withdrawable ( 'pension' ) Account balance.

The Seniors and Pensioners Tax Offset (SAPTO) provides a tax-free threshold for those over 65 of $32,279 for singles and $57,948 for couples. Depending on the investment return achieved, that means that seniors can have substantial assets outside super and still pay zero income tax. For some it may beg the question of why they need to remain in super, with all its rules and regulations, just to receive the benefit of zero tax on investment income.

"tax-free threshold for those over 65 of $32,279 for singles and $57,948 for couples": With Low & Middle Income Tax Offset" increased from $255 to $675": . Single $35,231.76 . Couple: each $33,868.44; combined $67,736.88 ( https://paycalculator.com.au/ )

ERROR in paycalculator ( reported to author by me ).

SAPTO calculation tapers to $0 at income of $70,763.95 with no super, over 65, spouse. Should be $41,790.

My calculation of tax free threshold for senior couple: each $31,926.20.

SAPTO in paycalculator.com.au FIXED: Tax free threshold for senior couple each $31,926.19 / y, at which marginal tax rate is 32%. My calculation agrees: each $31,926.20 / y.

RE " it is quite simple to create a new (additional) pension account to accept a contribution to the pension 'phase'. " I expect their would be minimum amounts to start a pension ? - one fund I looked at it was $50,000 .... just saying

As I understand it, one cannot add to money in a pension phase. So if a retiree woks part time and is paid some super contributions then an accumulation fund is needed to receive that money.

The benefit of having Super assets in pension mode rather than accumulation, is that it's a tax free environment. Zero tax on income and zero tax on capital gains. In accumulation mode, income is taxed at 15% and capital gains are taxed at 15% (or 10% if held for over a year). I suspect that most who qualify to hold a Super pension but remain in accumulation, do not appreciate this significant difference.

A likely explanation is that for many Australians, superannuation is a black box and they have no idea that, because they are not personally liable for the tax, their super fund is paying the tax and that leaves them with less retirement savings.
Without expensive advice, many are unaware that there two types of super funds available in retirement with two types of tax treatments, because withdrawals from super are tax-exempt for them personally regardless of which fund the money is withdrawn from.
Many of those who do have the tax-free pension fund are not aware that they have an legal obligation to withdraw increasing amounts (in cash) from that fund as they age, but the fund cannot accept new contributions.Those mandatory pension withdrawals can therefore have significant cash-flow implications if the fund is invested in assets that don’t produce enough income such as residential property. Accumulation funds do not have this mandatory obligation.

In this article by Jeremy Cooper, he says : "Members in retirement who have met a condition of release pay no tax on income or withdrawals from their pension account. So there were potentially around two million accounts where tax at a headline rate of 15% per annum was being levied (unnecessarily) on investment income. The question is why? What is driving this behaviour? Is it just an oversight? A lack of engagement? Super fund inaction or older members making a conscious decision to treat accumulated super like a savings account? The fact is, there doesn’t seem to be an answer to these questions." Yes Jeremy...there IS AN ANSWER! Because it suits the Government  bureaucrats to collect that extra tax" simply by not informing retirees of their options! In my opinion that is a "dereliction of duty" to their employers!! Thank goodness for people like Graham Hand, Jeremy Cooper, and "Dear Deadly Dudley" who 'shine a light' into that infernal black-hole-of-retirement-finances! I am personally grateful and appreciative of their efforts but shouldn't "our bureaucrats " be providing that service to "us" anyway ? 

Actually, that sounds like the job of your superannuation trustee. The problem is that financial services law means that almost anything they say to you as an individual would be regulated as Personal Financial Advice - which would cost thousands of dollars per member to provide, and bring down a huge amount of risk on the super fund, which is ultimately paid for by you, the member.

Or they put out general statements - which they all do. But that doesn't get action, partly because at an individual level there are genuinely many considerations which makes the decision complex. Partly because of human nature (there's a whole discipline around behaviourial financial which is about the psychology of money decisions).

Yes, lots of taxes paid as a result, but bureaucrats are largely not the problem.

Shawn for some odd reason unknown to me some people want Big Government as they either can't see or don't want to acknowledge the fundamental need to take personal accountability. Whilst we're at it lets outlaw the ability to commit substance abuse (all unhealthy food, drugs and drink). The super regulations and tax laws are complex because the system is now designed to perpetuate all the "renters". The more changes the better for government bureaucrats, legal and accounting professionals (rather than financial advisers). 

Nowhere does anyone recommend getting good financial advice. It seems that people are in many different situations and the best strategy may vary from one to the other so it needs a comprehensive understanding of the tax and superannuation rules to optimise the outcomes.
On a slightly different subject, so many people complain of hitting the $1.7 million ceiling for tax beneficial super holdings. In my eyes, $1.7 million is a lot of money. By all means save more but don't feel entitled to have the remaining tax-payers subsidise your income from those savings.

Personal tax free threshold for senior: $33,868.44; marginal tax rate: 19% ( https://paycalculator.com.au/ ).
Super Accumulation Account marginal tax rate: 10% to 15%.
Super Withdrawable ( 'pension' ) Account marginal tax rate: 0%.

If personal marginal tax rate = 0% then keep maximum allowable in Super Withdrawable Account and make minimum required withdrawals or more. Unspent amount will accumulate in Personal Accounts and might earn income.

When personal marginal tax rate is likely to, is, or exceeds 19%, commute capital from Super Withdrawble Account to Super Accumulation Account to reduce capital in Super Withdrawble Account so that Minimum Withdrawals do not increase capital in Personal Accounts after expenditure.

So, what's the benefit????

Another piece of the jigsaw is the 17% "death tax" when a superannuation death benefit is paid to a non-dependant beneficiary (typically an adult child, when the last of Mum or Dad dies). So whilst the income earned on accumulation account assets is taxed at 15% in the year of income, there's a further 17% to pay on death, if paid to a non-dependant beneficiary. That's because earnings on accumulation account assets are added to the taxable portion of the superannuation account balance each year, inexorably building up the amount on which 17% death tax will be levied. So total tax 15% + 17% = 32%.

So it may be better to hold the investments outside the superannuation system, where income is taxed at 0% if under the (roughly) $33,000 tax-free income threshold for seniors.

Hi Stephen, 15% tax is on the income, 17% tax is in the principal, you can't add them together to get 32% assuming they are the same. And just to clarify, the 17% tax applies to the taxable component.

Agree. I should have said 15% + (17% x 85%) = 29.45%.
But the point remains that each year's after-tax earnings on accumulation account assets accumulate as "taxable component", increasing the amount at risk of being hit by the 17% death tax. In contrast, earnings on pension account assets accumulate as both tax-free and taxable components, using the ratio established at the time of pension commencement, so the death tax risk there builds up slower.

I'm currently personally bandying this exact question about in my head...

I'm 61, and retired, although haven't told my super fund, so I'm still in accumulation. I'm waiting for 1 July when I can put $110k into the account which will bring it all close to, allowing for the calculation of value of the DB pension I'm already getting, the $1.7m cap.

I don't immediately need any money from my super fund as I was the beneficiary of a healthy redundancy payment - and it will take a while to run that cash down - so do I leave it in accumulation, and, at a guess, pay about $6k in tax on earnings a year, or put it into pension mode (it's a self-invest fund completely directly invested in equities and has a in-specie transfer facility, so I'll be in the same investments regardless of account type) and have to initially draw out 4%, increasing over time, which is money I don't need to live on, and then have to invest it outside of super - which, added to existing ex-super investments, will put me into tax territory soon enough.

My inclination is to leave it in accumulation for a year or so more, and pay the tax, until life as a retiree is a little more settled, but I will do some calculations and see if that changes my mind.

It also feels somewhat "wrong" to go from paying tens of thousands in tax a year to nothing, just like that. But I guess I'll get used to that.

Geoff - I suspect this is a reasonably common question these days! One comment - due to the extended pandemic provisions you only need to draw a minimum of 2% in 2022/2 tax year from a pension if you start it. Who knows if that rule will be extended ? But, as you say, it's relatively easy to calculate the tax you'd pay by leaving the pot in accumulation versus starting a pension and possibly paying tax on any withdrawn money 'outside super' in due course....

Feels ‘wrong’ to pay no tax ? You mean morally wrong ? If yo feel that way exercise some control over where your money goes and donate to a cause the amount you feel you should be paying in tax. At least you then decide where your money goes rather than just letting it go into a black box.

Couldn't agree more with Ian.

My experience is that the accumulation accounts are performing better than the income stream accounts,that is growth and high growth options,compare the two and it is compelling at this point in time.
One has more financial control and can withdrawal funds as required but more importantly when you do,so if the market is booming great time to withdraw some funds,if the market is falling,I’m not compelled to withdraw .

I have noticed this too with my large super provider. Specifically that when returns are positive, pension account returns are higher than accumulation account returns. However when returns are negative (as they seem to be at the moment), they are more negative for the pension accounts. And it is those with pension accounts who have to take out a minimum amount over the year.

The difference is in the allowance for capital gains tax. Deferred tax liabilities are created when returns are positive and reduced when they are negative. The accumulation accounts can outperform if the reduction in deferred tax on capital gains is greater than tax on the dividends/interest.

I agree with this as well which stopped me from switching my parents accumulation accounts to pension as they dont currently require the pension income. Accumulation accounts all performed better on a 10-year basis than the pension accounts, even after factoring the 15% tax.

However the argument still remains on whether it is worth investing this money personally and staying within the tax-free thresholds. Would be beneficial if you are able to generate the same level of return as within the super funds.

If you’re over 67, don’t need the cash and can’t recontribute the minimum drawdown, it makes sense to leave it in the accumulation account. Also some will exceed the Transfer Balance Cap so have to keep the excess in the accumulation account.

Funds kept in super in accumulation phase are not counted for the age pension assets test if the owner is under age pension age. So it's quite common to see a couple with a spouse over age pension age getting full age pension because their younger spouse has their super in accumulation phase. Then when the younger spouse is eligible for the age pension their super is converted into pension phase. 

I enjoyed this article as a general update on super, but it's not explicit on what the 'benefit' is referred to in 'Too many retirees miss out on this valuable super fund benefit'. I think it's that members can set up pension accounts through their super fund, but it would help if the 'benefit' we are missing out is explained in the first paragraph or two.

Maybe they have a defined benefit pension as well so are limited by the cap.

Anyone still paying insurance premiums within super needs to leave enough in the Accumulation account to pay them so cannot roll over the full balance into the pension account.
Anyone still occasionally working and contributing or receiving spouse contributions needs the Accumulation account to receive extra contributions over time, so again could have a small balance in an accumulation account after rolling most into Pension account.

One clear, but only partial explanation, is that there is no minimum draw down while in Accumulation mode and that thought makes more and more sense as you age. Do you really want to be drawing down 6%, or 7% or 9% or 11% or even 14% if you make your nineties?

Many of these accounts will be relatively static so the tax impost will be something less than 15%, likely with franking credit offsets, you can withdraw what you need vs what you are told to by Canberra. Has some merit if you don't trust Canberra!

I suspect, a bit further down the track, for those over 80, forced to draw 7%+, commutation back to Accumulation, from Pension mode will be considered by many

"I suspect, a bit further down the track, for those over 80, forced to draw 7%+, commutation back to Accumulation, from Pension mode will be considered by many":

At retirement and especially for over 80's , most do not have enough Super to be worth keeping in a Super Withdrawable ( 'pension' ) Account as their personal marginal tax rate = 0%. Unless expecting a large personal income or capital windfall, they would be slightly better off withdrawing all capital from Super and investing directly in something like a Vanguard Diversified fund.

Thanks Jeremy
A couple of possible explanations for the over 65 accumulation accounts:
1 Some over 65s are still in the workforce and don't want or need two accounts (accumulation and pension) and don't want to pay two sets of fees. Further they don't yet need the income. Of course, they may be paying some extra tax but why make a change to their situation? There is no strong push.
2 Some accumulation accounts for the over 65s will be for those who have a pension account already and have used up their Transfer Balance Cap