Should I close my super account when I retire?

Tax-free status

When you transfer your super balance to a retirement income stream (also called a pension), all your future investment earnings and income are tax free. This is called the ‘retirement phase’ of super and is separate from the ‘accumulation phase’ you make contributions to while working. In the accumulation phase, investment earnings are taxed at a maximum rate of 15% with most large funds paying around 7% thanks to tax deductions and credits.

If you choose to withdraw your balance and invest outside super, any earnings such as dividends, interest or rent are taxable. If you later sell an investment held out outside super that has grown in value, the capital gain will be taxable too. The tax-free status of the retirement phase in super is key to what makes it a very attractive place to invest.

Another benefit of this tax-free status is the potential for your fund to pay you a ‘retirement bonus’. This bonus represents a refund of money the fund had set aside to pay capital gains tax on assets in your account in future.

When you transfer to a pension account and keep the same investments, those assets are transferred to the tax-free environment, removing any liability to pay the tax. If you have a self-managed fund or have chosen ‘member direct’ investments, your assets can be transferred straight to the retirement phase, completely avoiding the capital gains tax you would otherwise need to pay on selling them if you cashed your balance out of super.

Super pension options

There are two different types of superannuation pensions – account-based and non-account-based. Account-based pensions have a minimum annual income payment and allow you to withdraw lump sums as and when you need. Non-account-based pensions (such as annuities and guaranteed lifetime income (GLI) products) don’t usually permit lump sum withdrawals, but pay income guaranteed for a set period or for life and can increase the rate of Age Pension you receive.

A super pension doesn’t need to be your only source of income. Most Australians are eligible for at least some Age Pension, if not immediately after reaching the pension age of 67 then later as their assets decline. Many people also have income from other investments.

To restrict the amount one person can use to enjoy tax-free status, the government introduced the transfer balance cap. This cap limits the amount you can transfer to the retirement phase and is currently set at a maximum of $1.9 million. Any excess must be retained in the accumulation phase or withdrawn from super.

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Investment management expertise

Your super fund has hopefully served you well so far by providing access to high-quality investment options, and this can continue throughout your retirement. Large funds offer investment menus with something to suit just about everyone and have significant expertise in funds management. Most funds will also offer you advice to help you choose the option(s) that best suit your needs, frequently at no extra cost.

Your fund can continue investing and growing your money for you after retirement, and this growth can be much more important than you might think. A common ‘rule of thumb’ is that 10% of your retirement income will come from money you put away, 30% from investment growth during your working life and 60% from investment earnings after you retire. With so much at stake, having the right management at the helm is critical.

Think about whether you would have the skills to invest your balance if you were to withdraw it from the system and, if not, whether you could easily access managed funds outside without incurring significant additional costs.

Alternatively, if you do have the skills, experience and interest level to select invest investments yourself, you could consider choosing a super fund that offers their members access to direct investments, or even a self-managed super fund, to keep your money in the tax-advantaged environment super provides and take the hands-on approach you want.

Making your money last

Sadly, there are many examples of people who withdraw quite a large balance from super only to see it slip through their fingers in a few short years. When you’re not accustomed to having ready access to a large amount of money, spending can be tempting – just think about all the tragic lottery winner stories.

Opening a retirement income stream means you have an account set up to pay you a regular income – just like you were used to when working. This can help you to view your balance less as a personal slush fund and more as a facility to provide income for the rest of your life. What’s more, you can still withdraw lump sums from an account-based super pension if and when needed.

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Options to continue contributing

There are now more options than ever for older people to continue contributing to super. Your contributions need to go into the ‘accumulation phase’, so you’ll need to keep some money in an accumulation account, or open a new one, if you would like to make contributions.

Contributing means more money going into the tax-advantaged environment provided by super, and the potential to reduce income tax via concessional contributions. For example, if you sell some investments outside the system and make a capital gain, a concessional contribution could help reduce your CGT liability.

If you’re under 75 and your total super balance is below the transfer balance cap, you can make non-concessional (after-tax) contributions.

Anyone can make concessional (pre-tax) contributions prior to age 67, but between the ages of 67 and 75 you need to meet the work test. No more concessional contributions can be made beyond age 75, unless you are working and your employer is required to pay super for you.

Anyone over 55 can make a downsizer contribution if they sell their home after owning it for 10 years or more.

A recontribution strategy may also assist you to minimise tax for beneficiaries that inherit your super or to move funds to your spouse’s account if they have a lower balance.

The bottom line

For most of us, retirement won’t mean cashing in our super. The system is carefully designed to provide Australians with a sustainable and flexible source of retirement income, and tax-free status provides a huge incentive to use it.

Of course, there are exceptions to every rule. Perhaps you will need to cash a lump sum from super to help pay off a remaining mortgage, for needed renovations, or another important purpose. If you will have some super remaining, it is still important to consider whether keeping it in the system could benefit you.