Retirees Overpaying Tax by Missing Super Shift

Hundreds of thousands of Australian retirees may be overpaying taxes on their superannuation by not transitioning their super funds into retirement mode, potentially missing out on substantial savings.

Recent findings by the Super Members Council (SMC) reveal that around 700,000 Australians over 65—many of whom are no longer working full-time—are keeping their superannuation in accumulation accounts. This decision exposes these funds to a 15% tax on earnings, unlike retirement-phase accounts, which are tax-free on earnings below $1.9 million.

The research estimates that affected retirees collectively hold $90 billion in super funds still in accumulation accounts. On average, retirees could be paying an additional $650 in taxes annually, with some facing an extra tax bill as high as $4,500 over their retirement. Balances of $200,000 could result in $9,000 in unnecessary taxes if not switched to pension mode, highlighting a significant financial oversight.

The study attributes this issue to a combination of disengagement and lack of guidance. Many retirees with smaller balances—less than $100,000—admit they don’t know how to handle their inactive accounts or are unsure about transitioning their super. Data shows that approximately six in ten lower-balance retirees fail to act due to uncertainty or hesitation.

SMC emphasises that proposed federal legislation aimed at enabling super funds to offer basic financial advice could address this problem. The legislation would allow more Australians to access affordable, straightforward guidance about managing their retirement funds, filling a major gap in the system. However, the laws are yet to be introduced to parliament.

With nearly 2.5 million Australians approaching retirement, the reforms are seen as crucial for facilitating better-informed decisions while making financial advice accessible to more people. This shift could significantly reduce the number of retirees unknowingly overpaying tax and enhance retirement outcomes across the nation.

Sources: Australian Retirement Trust, Treasury.gov.au, The Australian