Is there such a thing as a voluntary taxpayer?
You would think not, but there are a growing number of retirees who seem to be happy to pay a 15% tax on their super earnings every year, when they don’t need to.
This extraordinary situation is probably best explained by ignorance of the rules, indecision, enthusiasm to keep working, a reluctance to dip into their super too early (FORO – fear of running out) or even good, old-fashioned laziness.
The widespread problem comes about when people retire, but keep their superannuation sitting in the accumulation phase instead of rolling it over into the pension stage – sometimes for many years and even decades.
Tax snowball rolls on – reducing amount in super
That not only robs them of a totally tax-free regular income if they are over the age of 60, but it also leaves all of the earnings within the fund liable to the 15% headline rate of tax on investment income – a tax that will be snowballing every year, and not in a good way, the longer it continues to apply.
This is not a small issue either with former ASIC deputy chair Jeremy Cooper – who literally wrote the book on superannuation in the form of the Cooper Review – estimating that around two million super accounts that belong to people, who have reached an age-based condition of release for their super still leaving their accounts in accumulation mode.
That’s a serious amount of voluntary tax being paid.
Furthermore Mr Cooper – who is now chairman of retirement income at annuity provider Challenger – has discovered using APRA data that of the 700 Australians who retire every day, only around 60% have rolled their super over into pension mode.
A lack of keenly priced and appropriate retirement products may go some way to explaining such a mass of people voluntarily paying tax – something that may be improved now that the recently legislated Retirement Income Covenant will require super funds to have an appropriate retirement income strategy for their members from July 2022.
Extra tax paid could be approaching $20b a year
While it is impossible to know the actual overall figures, if we multiply the current average retirement pension account of $330,000 by the two million people who have inexplicably stayed in accumulation mode, the tax on an investment gain of 20% in a year would be knocking on the door of $20 billion.
That is a very simplistic “back of the envelope” calculation because it doesn’t account for franked dividends and other wrinkles but the fact remains that there is a lot of money being mailed off to Canberra each year when you consider that it will not be available in the super account again and won’t keep earning money.
One of the possible reasons for this reluctance to enter pension mode might be a belief that an accumulation account is required to make new contributions if new work is undertaken.
The flaw in that argument is that there is no problem opening up a fresh accumulation account for any new contributions after rolling over an existing fund or even several funds into tax-free pension mode.
Sending your pension payments to Canberra instead?
It is entirely possible that inadvertently leaving a super account in accumulation mode could be reducing the account by more through tax than applying the minimum annual pension payments, which for 2022-2023 will remain at the COVID-19 reduced rate of just 2% a year, rising with age.
In other words, the super member has “decided’’ to forgo their tax-free income and instead send it off to the tax office instead.
There are some suspicions that keeping an account open for fresh contributions might be part of the problem because the accounts that remain in accumulation mode tend to be smaller than those that have been rolled over into pension mode.
Is keeping an account open for fresh contributions to blame?
So, some retirees who have two active accumulation accounts when they retire might decide to keep the smaller one open as an accumulation account just in case they want to make more contributions from a part-time job or through the various situations in which extra contributions can be made.
That can turn out to be a very expensive oversight over time.
At the moment – according to Mr Cooper’s analysis of the APRA numbers – about $477 billion is in APRA-regulated retirement income funds in pension mode, with a further $18 billion in transition to retirement accounts.
Retail funds make up the bulk of this compared to industry funds – perhaps reflecting the fact that members of industry funds tend to be younger.
In APRA-regulated funds, there were many accounts belonging to members who were above preservation age (the age that you can access your super) that had not been rolled over into a pension account.
For example, there were 2.6 million accounts where the member was over 65 (meeting at least one condition of release) but only 1.4 million of these were pension accounts.
There were an additional 1.5 million accounts where the member was between 60 and 64 and could have met a retirement condition of release, with only 250,000 of these in a pension account.