Hundreds of thousands could be paying tax on super unnecessarily

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Hundreds of thousands of older Australians are paying tax on their super despite there being a perfectly legal way to avoid it, with many who have reached age 65 not aware of a key change they can make to preserve their retirement savings – even if they are still working.

Figures from AustralianSuper show about 140,000 of its members over the age of 65 have their super in accumulation accounts and are paying 15 per cent tax on their super’s investment earnings.

Jonathan Philpot, wealth management partner at HLB Mann Judd, says most people should have a pension account by 65.Credit: Jessica Hromas

Along with “accumulation” accounts – the accounts everybody initially establishes to receive contributions from their employer – super funds have “pension” accounts, which are usually tax-free, from which lump sums or income streams are paid typically in retirement.

A pension account can only be started when a condition of release is met, which will usually be at retirement, or at age 65, even if still working. However, some over-65s could have sound reasons for not starting a pension account, including how it interacts with the age pension.

Also, some super fund members who are 65 and over and have an accumulation account with one fund may have a pension account with another super fund.

But the AustralianSuper numbers show it is likely, across all super funds, that there are hundreds of thousands of 65s-and-over who are simply not aware that they do not have to pay tax.

For those with a financial adviser, the significance of turning 65 would be made clear to them. However, many fund members, particularly those in industry funds, do not have a financial adviser. Adviser numbers have dwindled, leading to a rise in the cost of face-to-face advice.

The amount being paid in tax unnecessarily is significant.

A 65-year-old who has $400,000 in their accumulation account and is earning 4 per cent over a 12-month period pays 15 per cent, or $2400, in tax on the earnings. Someone with a balance of $800,000 pays $4800 in earnings tax.

Jonathan Philpot, a wealth management partner at HLB Mann Judd, says those still working would want to keep their accumulation account open to receive the superannuation guarantee and any non-concessional personal contributions, subject to caps, that they are allowed to make until age 75.

Under the superannuation rules, at age 65 a minimum of 5 per cent of the balance of the pension account must be drawn each financial year, whether as an income stream or a lump sum.

For those who do not need the money, they can pay it into their accumulation account as a non-concessional contribution, subject to caps.

Even though the earnings will be taxed at 15 per cent, every so often, under the strategy, the money built up in the accumulation account could be transferred to the pension account, Philpot says.

He says those over age 65 who have not started a pension account, as well as those coming up to their 65th birthday, should contact their fund or seek financial advice, as most people should have a pension account once they turn 65.

Super funds are restricted to giving general, factual advice, though they can contact members with information such as “now that you are over 65 you can start a pension account”.

A report on how super funds are supporting their members in retirement by the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA) released in July said funds need to make more progress to enhance the retirement outcomes of their members.

Margaret Cole, APRA deputy chair, said a further 3 million members will become eligible to draw from their super in the next 10 years. “They are entitled to rely upon their super fund for assistance as they plan for a sound financial future,” she said.

Cole said funds “must step up and deliver both well-considered strategies and action to support members in retirement”.

Shawn Blackmore, chief officer of retirement at AustralianSuper, says during last financial year the fund provided guidance to almost 20,000 members who contacted the fund for help, most of whom were more than 50 years old.

The fund also communicated with 45,000 members through education seminars and webinars.

Blackmore says about 53,000 of AustralianSuper’s members receive financial advice through arrangements the fund has with external advisers.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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