Should I close my super account when I retire?

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Tax-free status
Super pension options
Investment management expertise
Making your money last
Options to continue contributing
The bottom line

When it comes to super, a common misconception is that retirement is the end of the line. You might be one of the many people who believe that leaving work means it’s time to cash out your balance and call it a day, perhaps splashing out on a caravan to do a lap of honour around Australia.

In truth, retirement is when the super system really comes into its own. It is a new beginning, rather than the end of the story.

When we say retirement, we really mean meeting conditions that will allow you to access the super you have accumulated without any restrictions. Most often, this means leaving a job after age 60 (even if you then start work again), retiring permanently after your preservation age, or reaching age 65 even if you are still working.

So, what puts super in prime position during your retirement?

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.

Need to know

The explanation above applies to taxed super funds – the type held by most people. If you are a member of an untaxed fund, you may receive taxable income from the fund in retirement or transfer your balance to a taxed fund to receive tax-free income. Benefits transferred will have tax withheld when received by the taxed fund, to convert your balance from untaxed to taxed.

Learn more about tax on payments from untaxed funds

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.

Example – franking credits

Faizal likes to invest in Australian shares and intends to cash a good portion of his super after retirement to add to his portfolio. He has calculated he won’t pay much tax because most of his shares pay fully franked dividends. This means company tax of 30% has already been paid, and Faizal receives a tax credit, called a franking credit. He expects his income tax rate will also be 30% (2024–25 rates) so the credits will offset most of the tax he would otherwise owe. He doesn’t see how choosing super would benefit him.

However, if Faizal received those dividends and attached credits inside a retirement phase account in super, with a 0% tax rate, the full franking credit would be refunded to his account.

Let’s take the example of a $700 dividend. If the shares are fully franked, the attached credit would be $300. For an investment outside super, Faizal would need to declare $1,000 in his tax return ($700 dividend, plus $300 credit).

The tax calculated on this amount if Faizal is in the 30% tax bracket (32% including Medicare Levy) would be $320. Faizal has $300 in credit, so would need to pay $20 in tax, bringing the value of his $700 dividend down to $680.

If Faizal instead held the same shares inside a retirement income stream account, the super fund would also declare $1,000 of income, but no tax would be owed. The $300 credit would therefore be refunded and added back to his account as additional investment return. Faizal would receive $1,000 of benefit from his dividend instead of $680 outside super.

If the power to choose specific shares is important to him, Faizal can select a super fund that has this facility, often called ‘member direct’ investing.

Read more about dividend franking and how it works.

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.

Learn how lifetime income streams can boost retirement income.

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.

Learn more about the transfer balance cap.

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.

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.