Leaving Your Super in the Accumulation Phase
Many Australians reach retirement age and wonder about the fate of their superannuation. Contrary to popular belief, there is no hard-and-fast deadline to withdraw or transition your super once you become eligible. You have the option to leave your money in the accumulation phase, where it has been throughout your working life. This means your funds will continue to be invested, and your balance will fluctuate with market performance, just as it did before you retired.
Benefits of staying in accumulation
Leaving funds in the accumulation phase offers several distinct advantages, depending on your personal circumstances:
- Continued Growth: Your super balance remains invested, with the potential for long-term growth, particularly if you do not need to draw on it immediately.
- Flexibility: You are not locked into making regular withdrawals. While you can still take out lump sums as needed, you are not bound by the minimum annual withdrawal rules that apply to pension accounts.
- Maintain Insurance: For many, keeping an accumulation account is necessary to retain any associated insurance, such as death, total and permanent disability (TPD), and income protection cover. If you move all your funds to a pension account, this insurance may cease.
- Centrelink Assessment: If you or your partner are under the Age Pension eligibility age, the balance in your super accumulation account is generally exempt from the Centrelink assets test.
Considerations for staying in accumulation
While attractive, this strategy also has drawbacks. The primary concern for many is the tax treatment of investment earnings. In the accumulation phase, your fund's investment earnings are taxed at up to 15%, which may be higher than what you would pay on an income stream in retirement. It is essential to weigh the potential growth against this tax rate, especially if you have met the criteria to access tax-free earnings in the pension phase.
Transitioning to the Pension Phase
For many retirees, moving some or all of their super into a retirement income stream, like an account-based pension, is the most tax-effective strategy. Once you meet a 'condition of release' (such as reaching preservation age and retiring, or turning 65), you can begin this process.
Tax-free earnings
A major incentive for moving to a pension account is the tax-free status of investment earnings. Unlike the accumulation phase, where earnings are taxed at 15%, your investment returns within an account-based pension are not taxed. For those with substantial super balances, this can mean a significant increase in their retirement income over time.
Annual minimum withdrawals
When you start an account-based pension, you are required by the government to withdraw a minimum amount each financial year. This minimum is a percentage of your account balance and increases with age. For example, for those aged 65 to 74, the minimum is 5%. This rule is designed to encourage retirees to spend their savings and is an important consideration for your cash flow and investment strategy.
Comparison: Accumulation vs. Pension Phase
Making the right decision for your retirement funds requires a clear understanding of the differences between the two main super phases. The following table summarises key points of comparison.
| Feature | Accumulation Phase | Pension (Retirement) Phase |
|---|---|---|
| Tax on Investment Earnings | Up to 15% | 0% (tax-free) |
| Annual Withdrawals | No minimum, take lump sums as needed | Must take a minimum annual payment |
| Making Contributions | Can receive contributions (if under 75) | Cannot receive new contributions |
| Insurance Cover | Can be maintained if fund rules allow | May cease if accumulation account is closed |
| Centrelink Impact | Not assessed under means tests before Age Pension age | Assessed under means tests from the start |
| Flexibility | High flexibility, no fixed income stream required | Provides regular income, with flexible ad-hoc withdrawals |
| Transfer Limits | No limit on how much can be held | Limited by the Transfer Balance Cap (TBC) |
Strategic Considerations for Your Super
For many, a blended approach is the most effective. This involves moving a portion of your super to a tax-free pension account while leaving a residual amount in the accumulation account. This strategy can be particularly useful for:
- Managing the Transfer Balance Cap (TBC): If your super balance exceeds the TBC (currently $2.0 million), you can move up to the cap into a pension account and leave the excess in the accumulation phase. This allows you to maximise the tax-free benefits while still holding your excess funds in the super environment.
- Retaining Insurance: Keeping a small balance in accumulation can help you maintain vital insurance policies that might be lost upon closing the account.
- Estate Planning: The choice of how you structure your super can have implications for your beneficiaries. An account-based pension with a reversionary beneficiary may simplify the transfer of benefits upon your death.
Accessing Your Super
To access your super, you must meet a 'condition of release'. The most common conditions are:
- Reaching Preservation Age and Retiring: For those born after June 30, 1964, the preservation age is 60. You must permanently cease gainful employment to access your super under this condition.
- Turning 65: Regardless of your employment status, you can access your super when you turn 65.
- Transition to Retirement (TTR) Income Stream: If you have reached your preservation age but are not yet retired, a TTR allows you to draw an income stream while still working. Earnings within a TTR are taxed at 15%.
For detailed rules and conditions, it is always best to consult an official resource like the Australian Taxation Office (ATO) or a qualified financial adviser. A useful resource is the ATO's guidance on accessing super, available here.
Conclusion
Deciding how to manage your superannuation after retirement is a major financial decision with lasting consequences. You can indeed leave your money in your super accumulation account indefinitely, but doing so means foregoing the potential tax-free earnings of a pension account. The optimal strategy depends on your financial goals, tax situation, and desire for either continued growth or a steady income stream. Understanding the differences between the accumulation and pension phases, and potentially using a combination of both, will help you build a robust and tax-effective retirement plan.
