- 01Pension mode removes 15% tax on earnings.
- 02CBUS retirement bonuses averaged $4,300.
- 03Check terms before transferring; you may lose the bonus.
One of the more stressful times for those with superannuation is making the move from the accumulation or savings phase to the decumulation or pension phase.
For many, this move marks the end of a working life and a transition into retirement, an event that can be bittersweet in an emotional sense, particularly if your working life ended with an unexpected event such as redundancy.
In practical terms it is not quite as cut and dried as it may seem and it is possible to return to either part time or full time work at any time if desired after reaching the requirements for super access—usually reaching the age of 60 and stopping work at one job, or simply reaching the age of 65.
Pension Mode Usually a Good Idea
In a financial sense, the move to pension mode is almost always a good one.
The 15% tax on earnings disappears overnight and the Super fund that you have been contributing into all your life all of a sudden starts paying back the favour, usually at a rate of 4% a year to begin with depending on your age.
The super fund investment improvement should improve due to the lack of a 15% earnings tax being applied.
Indeed, one of the biggest mistakes many retirees make is to persist with leaving their fund in accumulation mode for far too long, paying needless tax for no reason.
Of course, there is no need to spend the super pension amounts—they can be saved if not required or even recontributed to a separate accumulation fund if that strategy suits.
Retirement Bonus Worth Considering
One of the added complications of making this switch is it some super funds are now making a pitch to keep your account with them by adding what they are calling a retirement bonus.
For example, big industry fund CBUS has boosted the super balances of almost 16,000 of its members by the hefty amount of $68 million because of a little-known bonus that many Australians are missing out on.
The bonus is paid when the member officially retires and moves on to a tax-free pension and in some cases the bonuses can be many thousands of dollars.
Since the retirement bonus was introduced, CBUS members have received an average tax refund of about $4,300, with the largest windfalls worth tens of thousands.
Show Me the Money (Source)
Where is this money coming from to pay these bonuses?
Well, the answer lies in the pooled nature of big superannuation funds which means that there is a chunk of overpaid super earnings tax that needs to be refunded when a member switches their account from accumulation to pension mode.
Unsurprisingly, some funds are using this effective superannuation tax return as a way to also boost their member retention rates.
They do this by linking the retirement bonuses to when the super account is switched from accumulation to decumulation mode.
That brings with it the chance of losing the bonus if you transfer your super out of the fund and into a different fund before changing it into drawdown mode.
So, the actual amount of the bonus depends on the amount of super tax that it has set aside to pay on your investment earnings.
Once the account is switched to pension mode, some of that tax is no longer required to be paid and is re-credited to your account as a bonus.
Funds Not All the Same
The confusion arises because not all super funds use this style of bonus calculation to refund excess tax collections, although the strategy is gaining in popularity.
Bonuses have become more common among both industry funds and retail funds as a way of retaining members and some even mandate that you have been with the fund at least a year to get a bonus.
Of course, there are other considerations apart from a welcome retirement bonus to consider—mainly the level of fees, the investment and administration quality of the fund and long-term investment performance.
Always ask about any retirement bonus
However, it does add a further question to your fund when retiring about whether they offer a retirement bonus or not.
Once the bonus is paid to your pension account, the money is yours and should be able to be transferred to another fund if you decide to swap.
Retirement will involve a really long-term relationship with your chosen super fund so it is really important to be comfortable with the one you choose and not be too swayed by the possibility of a retirement bonus from your existing fund.
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The ASX small-cap stories that matter, filed before 9am AEST. Curated by the Small Caps desk.