Silver tsunami wave captures 700,000 retirees in super tax trap

As persistent inflation continues to particularly stress those who are no longer working, the government continues to collect 15 per cent tax on money held by those who have failed to register their retirement with their super fund.

What’s more, the issue is going to escalate dramatically if no changes are made to current arrangements as the number of Australians retiring each year is set to double from 150,000 to 300,000 under the so-called “silver tsunami”.

It’s another perverse twist in our complex super system that demands an urgent solution.

A bright idea from the Super Members Council, which represents large industry funds, may be the answer. It says the government should consider automatically removing tax from super accounts at age 65 for all eligible investors.

SMC chief executive Misha Schubert says the next step to reform would be a change in legislation by the government.

“We need to make the shift into retirement much easier and simpler for everyone,” she says.

Ironically, this unfair tax is most likely to hit older Australians with less money in super than those who are active investors who are more likely to be aware of most key super rules.

At present, an investor (or member) must inform their super fund that they have retired so that they can move from what is called the accumulation phase to the pension phase. Once in pension phase super is tax free for the majority of Australians.

Separately, under current legislation super funds are restricted from contacting investors and making suggestions on what they should do with their money.

Financial advisers continually alert investors to the need to unlock tax-free super by informing their super funds of their retirement, but there are clearly gaps and the SMC report is the first time the scale of the problem has become clear. The 700,000 figure emerged from a deep dive on super statistics the council carried out for the first time since 2020.

The report also throws light on the contentious issue of mandatory superannuation drawdowns, where under law all retirees must withdraw a set amount of super each year. The older you are the more of your super you must take out – it starts at 4 per cent initially and rises to a maximum of 14 per cent.

Some retirees complain they wish to manage their retirement savings as they wish and they should not be directed by the government on how to do so. A small number may also knowingly leave money in accumulation for individual reasons.

There has also been a string of reports suggesting that retirees should be made to withdraw even more from super by lifting the drawdown rates higher to avoid what some regard as exploitation of the system.

However, the new SMC data undermines the notion that older Australians are sitting in retirement fortunes and actively underspending to build tax-protected inheritance for future generations.

The report found that 64 per cent of tax-free retirement account holders – two out of three – withdrew above the minimum withdrawal obligation. The findings show the largest cohort exceeding the minimum are those with less than $50,000 in total super savings.

This article first appeared in The Australian as Silver tsunami wave captures 700,000 retirees in super tax trap