Over age 65’s paying tax that can be prevented

Currently the way the regulations are set for superannuation is that when you meet a condition of release or attain age 65 – you are eligible to create an account-based pension with your accumulated superannuation. The benefits are that the earnings within the fund will now be tax free (0%) whereas currently in the accumulation phase of superannuation they are taxed up to 15%.

Now, regulators such as APRA have suggested in the past years that over 1 million accounts could be eligible to commence an account-based pension and benefit from tax free earnings, however these accounts were still stuck in accumulation phase and paying up to 15% tax on the earnings still.

As an example on a balance of $100,000, if a fund earnt a 7% return for the year (or $7,000) – this could mean up to 15% tax may be paid in the accumulation phase which would be approximately $1,050. Now if this account was held in an account-based pension, then this tax would no longer need to be paid by the fund, resulting in more money in the investors pockets to help provide for their retirement. This is one of the big incentives of superannuation in the first place, it is a concessionally tax environment whilst you are still working/accumulating wealth, then in retirement it is there to provide you an income where fund earnings are effectively taxed at 0%. There are limits you can have invested in this tax-free earning environment and for someone starting an account-based pension today – that limit is $1,900,000 (see the ATO reference here).

It is important education is provided to consumers to make them aware of this but also personalised advice is still needed in most cases to see if an account based pension is right for your individual situation, as sometimes for example if you have a spouse with a different age or even yourself who might be receiving a form of social security payments – commencing an account based pension may impact your own or their social security entitlements which may put someone in a worse off net position.