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. The information applies whether you are a member of a self-managed super fund (SMSFs) or a large public fund.
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.
All these contributions and the earnings on them during the accumulation phase are locked away – or ‘preserved’ – until you reach your preservation age and retire, or you meet another condition of release.
Employer and salary-sacrifice contributions, and personal contributions for which you claim a tax deduction, are taxed at the concessional superannuation 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 7%.
Retirement phase (formerly called pension phase) begins once you have retired or met a condition of release and start withdrawing your super as an income stream. Confusingly, depending on your age and other circumstances you may still be working full or part time.
Super savings are transferred into the retirement phase when a member commences a super income stream (or pension). There is currently a cap of $1.9 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.
The most common type of super 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.
Pension payments and earnings on assets transferred into the retirement phase to support the pension income stream are generally tax free.
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 have more than one super pension account at a time.
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 your preservation age 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.