The simple mistake costing retirement-age Aussies thousands in tax

Approximately one in two Australians^ aged over 65 make one simple error that could cost them thousands of dollars over the course of their retirement.

That mistake is to leave their money in their taxed super account and make lump sum withdrawals, instead of switching it over to a tax-free pension account such as an account-based pension.

And the over-65s are not the only ones who are missing out. 

If you’re aged 60 or over and have satisfied the rules to allow you to access your super, such as having retired from work, you can also transfer your super to a tax-free pension account instead of leaving it in your super account where your investment earnings are taxed at rates of up to 15%.

So, let’s look more closely at why it’s worth considering switching your super to an account-based pension. 
 

Let’s follow the money to start with and look at how keeping your money invested in the tax-effective environment of a pension account can make a substantial difference to your financial outcomes. To understand the difference this can make, see the case study below. 

Linda is 67, has just retired, and has $300,000 in super. She owns her own home and gets the full government Age Pension.

She wants to withdraw about $20,000 a year from her super to spend on the things she enjoys: travel, golf and catching up with friends.

Should she leave her money in super and make lump sum withdrawals along the way, or switch it over to an account-based pension?

Our modelling shows Linda will be more than $5,000 ahead after five years if she switches her super to an account-based pension. This is because the earnings on her pension account are tax-free.

^{Source: CFS modelling*}

It’s possible your investment won’t make a positive return every year. But Australians are living longer, and many people can expect their money to be invested for 20 years or more in retirement.

You can also choose the level of risk you’re comfortable with by choosing the investment options in which your money is invested, just like you can in super.

As mentioned, if you’re aged over 60, the income payments you receive from your pension account are not included in your assessable income and are tax-free. So unlike your salary and wages, you receive the full amount, and it’s not reduced by income tax. 

However, there are rules you need to observe. For example, you must receive at least a minimum amount of income payments from your pension account each year. 

This is known as the minimum drawdown amount and is recalculated each 1 July based on the minimum drawdown percentage for your age and your account balance on that date. 

There is also a lifetime limit on the amount of super that you can transfer to a pension account. This is known as the transfer balance cap. 

When you transfer to a pension account you also get to decide how the money you transfer will be invested. The investment returns your account receives from those investments are tax free.

In contrast, if you leave your money in a super account, you will not need to withdraw a minimum amount each year - but the investment returns you get on that account will be taxed at rates of up to 15%. 

Therefore, the investment return on a pension account will generally be higher than a super account where they are invested in the same investments. While this difference can be small in any one year, it can quickly add up over time due to the power of compounding.  

Pension accounts, such as account-based pensions, are very flexible. You can choose the frequency at which withdrawals are made, providing you take out the minimum drawdown amount each year, and payments are made straight into your bank account. 

You can change your payment amounts and frequency at any time, and you're free to withdraw additional lump sums if you like. 
 

If you change your mind, you can also choose to close your pension account and do something else with your money. You’re not locked in. 

Transferring your super to a pension account when you retire can allow you to replace your salary and wages with regular tax-free pension payments in retirement. 

For example, you might choose to set up fortnightly payments, effectively paying yourself an income.

Depending on the balance in your account-based pension account, and any other investments you own, you may also qualify for a full or part-Age Pension. 

Another benefit of an account-based pension is that you can nominate who should receive whatever funds you have remaining when you pass away.  

Your pension can continue to be paid to your spouse, or they can withdraw the balance as a tax-free lump sum. It can also be paid to your other dependants.  

If your beneficiary is one or more of your children, they will generally need to receive the payment as a lump sum.  

Learn more about nominating a beneficiary for your super or account-based pension.

Or read more about how to get started with an account-based pension. 

Always seek financial advice to determine if this is the right strategy to suit your personal circumstances. You can also book a call with our guidance team to talk through your options.