In this guide
Superannuation is a long-term investment vehicle that carries you through two phases of life. There is an accumulation phase followed by a retirement phase, but it’s important to note that these aren’t mutually exclusive. You can have some of your super in an accumulation account and some in a retirement account as you navigate your way between the two.
Understanding the difference is important though, as each phase has different tax treatment, rules and potential strategies.
In this article we’ll briefly describe the phases and how they differ from one another.
Accumulation phase
Accumulation phase, as the name suggests, is where your superannuation savings are held during your working life and left to accumulate for your retirement.
When you enter the workforce, you must choose a super fund or accept the default MySuper fund offered by your employer. Your accumulation account with this fund can then accept compulsory Super Guarantee contributions from your employer or business. You can also make personal contributions, directly or via a salary-sacrifice arrangement with your employer.
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All these contributions and the earnings on them during the accumulation phase are locked away – or ‘preserved’ – until you reach age 60 and retire, or you meet another condition of release.
Employer contributions, salary-sacrifice contributions, and personal contributions for which you claim a tax deduction are taxed at the concessional rate of 15% (up to the concessional contributions cap). Non-concessional contributions you make from after-tax income are not taxed going into your super account.
All earnings from the investments within your super account are taxed at up to 15% in accumulation phase. However, capital gains on the sale of investments held for longer than 12 months receive a 33% capital gains tax discount, effectively reducing CGT to 10%. The Retirement Income Review (released in November 2020) found franking credits further reduced the effective tax rate for super assets in the accumulation phase to approximately 7%.
If you’re a member of one of our rare untaxed (constitutionally protected) super funds for government employees, your contributions and investment earnings are tax-free in the accumulation phase. Instead of paying tax along the way, your super is taxable when you withdraw it.
Retirement phase
Retirement phase (formerly called pension phase) begins once you start withdrawing your super as a retirement income stream/pension. Investment earnings in the retirement phase are tax-free, so many people choose to transfer their super savings to a retirement income stream as soon as possible. Withdrawals are also tax-free, unless your pension is being paid from an untaxed fund.
Confusingly, you may not be retired when you choose to enter retirement phase. The option to start a retirement phase income stream becomes available once you leave a job after your 60th birthday (even if you’re planning to work again in future), you have reached age 60 or more and have permanently retired, or when you turn 65 (even if you haven’t stopped work). You can also open one if your super fund is satisfied that you are permanently incapacitated.
There is currently a cap of $2 million that can be transferred into the retirement phase (known as the transfer balance cap). Amounts above this cap may remain in accumulation phase, or can be withdrawn from super entirely. Even if you have less than the transfer balance cap, you might choose to keep a small amount in your accumulation phase account to keep it open so you can continue to make contributions, since contributions can’t be made to an income stream.
The most common type of retirement income stream is an account-based pension. Minimum annual withdrawal rules are designed to ensure members use their retirement savings for their intended purpose – to provide income in retirement – rather than as a tax-effective vehicle for the transfer of intergenerational wealth.
Some or all of an account-based pension can be rolled back (commuted) into accumulation phase where earnings will be taxed at 15%, then used to commence a new pension in future. You can also have more than one super pension account at a time.
Different rules apply to transition-to-retirement pensions, pensions paid from defined benefit funds and annuity-style pensions that offer income for life.
The retirement phase was called the pension phase until 1 July 2017. The name was changed to reflect a change in the tax treatment of transition-to-retirement pensions, which can be started once you reach 60 even if you continue working full-time. The earnings on assets supporting these types of pensions are not exempt from tax.
There was criticism in the Retirement Income Review that Australia’s retirement system “focuses on the accumulation of savings for retirement, but insufficient attention is given to how people can best use their savings to support their living standards in retirement, such as drawing on their superannuation balances or accessing the equity in their homes”. With the adoption of the Retirement Income Covenant from 1 July 2022 by super funds (but not SMSFs), it is anticipated more funds will offer annuity-style products to ease member concerns about outliving their retirement savings.
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