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Superannuation has two broad phases – the accumulation and retirement phases, but it’s important to note that they aren’t distinct. Someone can have some of their super in accumulation and some in retirement.
In this article we’ll briefly describe the phases and how they differ from one another.
The accumulation phase is the first stage of everyone’s superannuation life – when you are contributing to your superannuation account, or when your super balance is accumulating. All the contributions you make during the accumulation phase are ‘locked away’ (preserved) until your retirement.
Concessional contributions and fund earnings in the accumulation phase are taxed at the rate of 15% (up to the concessional contributions cap), although the Retirement Income Review (released in November 2020) found that found that due to franking credits and capital gains discounts the effective tax rate for super assets in the accumulation phase was 7%.
The retirement phase (formerly called Pension phase) is the latter of two periods within superannuation, which is when a member is making active contributions to the super fund, or their employer is doing that on their behalf.
Super funds are transferred into the retirement phase when a member commences a super income stream (or pension). There is currently a cap of $1.6 million that can be transferred into the retirement phase (known as the transfer balance cap) and amounts above this cap need to remain in accumulation phase.
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Fund earnings on assets transferred into the retirement phase to support the pension income stream are tax-free (and are known as exempt current pension income).
The retirement phase was called the pension phase until 1 July 2017. However, the name of the phase was changed to reflect a change in the tax treatment of transition-to-retirement pensions. The earnings on assets supporting these types of pensions are not exempt from tax.
There was criticism in the recent 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.”