The traps forcing retirees to pay more tax than they have to

There’s a puzzling issue in Australian retirement finances that’s got everyone scratching their heads: why aren’t older Aussies making the switch to retirement-phase superannuation sooner?

This article appeared first in The Age, The Sydney Morning Herald, Brisbane Times and WA Today on the weekend and drove a lot of discussion on Linkedin. Read it here.

There’s a puzzling issue in Australian retirement finances that’s got everyone scratching their heads: why aren’t older Aussies making the switch to retirement-phase superannuation sooner and reaping the sweet, tax-free benefits?

It’s a bit of a head-scratcher because, believe it or not, there are more than a million retirees down under who are leaving their hard-earned cash on the table for the taxman to feast on for longer than necessary. Ouch!

To put things in perspective, there are nearly 1.3 million APRA regulated superannuation accounts out there in the accumulation phase, holding a whopping total of close to $225 billion, all in the hands of folks aged 65 and up in our country.

These are folks who, regardless of whether they’re still working, could make the leap from the “accumulation phase” to the ‘retirement phase’ and watch their superannuation earnings and capital gains become tax-free instantly, adding a decent amount to their annual returns.

But they haven’t done this for some reason. And guess what? There’s also a bunch of people in their early 60s who could join the club and enjoy those tax breaks. Sure, some of these accounts will be held by those who have more than $1.9 million in their transfer balance fund and can’t move any more to retirement phase, but we know that’s a far smaller number of people than the number of accounts sitting out there.

So, why’s it happening? Well, the experts seem to think that a lot of folks nearing retirement just don’t quite grasp the ins and outs of their superannuation. It’s like a secret treasure chest they haven’t cracked open yet.

But in doing so, they don’t realise that they’re paying up to 15 per cent income tax as well as capital gains tax on their investments in the accumulation phase that they wouldn’t have to pay in the retirement phase of superannuation.

So let’s stop for a minute and understand how it works, and what you might want to consider if you’re one of these people. Superannuation is not an investment. It is a tax-advantageous investment structure. And it has two phases.

Accumulation Phase: During this phase, people contribute to their superannuation fund, and their contributions are generally taxed at a concessional rate of 15 per cent. The money invested in the fund grows over time through various investments, such as stocks and bonds. This phase typically occurs while people are still working and saving for retirement.

Retirement Phase: Once a person reaches the age of retirement (usually 60 or older), they can start drawing on their superannuation savings. In this phase, the income generated from the superannuation fund, including pensions and withdrawals, is typically tax-free. That is, income tax-free and capital gains tax-free. So, the amount your same pool of monies invested can earn once in retirement phase is usually higher than in accumulation phase. Ultimately, this phase is designed to provide financial support during retirement that will allow you a passive income for the rest of your life. So, what do you need to know to make the most of your superannuation, potentially increase your income, and reduce your tax burden during retirement?

Let’s break it down:

This article continues on the Sydney Morning Herald. You can read it all here.