How to axe superannuation tax with one diary entry
If you haven’t done it already, you should have an alert in your calendar for your 65th birthday.
That is the day when even if you are still working, you can move your superannuation into drawdown mode and stop paying super taxes entirely.
Unfortunately, more than a million Australians of that age or older are still paying these taxes, even though they don’t need to, with a lack of understanding about how superannuation works being the main reason.
Of course, you may be able to move your super into drawdown mode even earlier depending on when you stop working and your preservation date so this is an area that everybody should keep an eagle eye on as they approach retirement.
You can keep working and still cut the tax
One of the widespread misunderstandings seems to be that if you are still working, you need to keep your super fund going to accept contributions.
This is true in one sense but it is entirely possible to transfer the bulk of your super into drawdown mode and still keep a separate accrual super account to accept new contributions.
The other misunderstanding seems to be among those that don’t want or yet need the income stream that will come from a super account that has entered drawdown mode.
This “problem” is easily solved by investing the resulting income – usually 4% a year of the super balance but rising with age – outside of the super system.
There is no requirement that you spend the resulting private pension income if you don’t want to, it simply must be transferred to you.
Continuing super tax can be very costly
So why is it so important to move your superannuation savings into drawdown mode as early as possible?
The answer is simple – to get rid of the super taxes that are literally chewing away at your balance unnecessarily.
The earnings on money held in super is taxed at 15% during the accumulation phase but once you move into the pension phase, there is no tax.
Problem hits more than a million people
According to annuities provider Challenger, around 1.3 million super accounts worth $225 billion belonging to people aged over 65 have not been switched over and are paying unnecessary tax.
Often people with superannuation accounts are completely unaware of this tax on the earnings of their fund because it is paid by the super fund but it is a very real cost.
It is a big problem too because the number of accounts in drawdown mode is roughly equivalent – 1.4 million accounts holding $400 billion and not paying tax.
The rising average age of retirement could also be playing a part, having risen from 53.5 to 64.3 years over the past 20 years.
Running out of money a worry
Another issue could be worries about running out of money in old age – although paying unnecessary taxes is actually making that problem worse.
Another factor is something the Federal Government is trying to get super funds to improve on by increasing awareness of retirement products and helping people to access appropriate retirement planning.
Could the switch become automatic?
One idea that has been raised by large industry fund AustralianSuper is for fund members to be automatically switched from savings mode to drawdown mode using the same account once they reach retirement age.
That is a less than perfect solution compared to a more engaged super member choosing their own timing and retirement income product but perhaps it is a necessary step given the very high numbers of people who continue to pay unnecessary super taxes long after they don’t need to.