Retirement phase grows at pace
According to the latest data, just over 350 new superannuation pension accounts are opened every day across Australia’s large super funds. Another 70 people retiring will be in an SMSF and moving into a tax-free pension.
The retirement income covenant requires super funds to have an appropriate retirement income strategy for their members from July 2022. Members need a better retirement solution than using an account-based pension and minimum drawdown.
How much money is in the retirement phase?
APRA-regulated funds had a total of $477 billion of member money in retirement income accounts in June 2021. A further $18 billion was represented by members with transition to retirement accounts, together with $54 billion held as ‘other pension benefits.’ The ‘other pensions’ could have been child pensions or for those with a permanent incapacity, so for the purpose of this paper are not considered retirement pensions.
SMSFs had an additional $403 billion in the pension phase in June 2020 (according to the most recently available data). More retirees, strong investment markets and temporarily reduced drawdown requirements, means that figure would have been higher by June 2021.
Around $900 billion of the $3.3 trillion in super in June 2021 will have been in the pension phase.
Retail funds hold more retiree money than APRA-regulated funds in other sectors
The $477 billion of retiree money in large super funds is weighted more heavily to the retail sector. This effect is largely demographic. Industry funds tend to capture members when they join the workforce and so have a younger average member base. The relatively older members in the retail sector have a greater need for advice as they approach retirement, which traditionally was more likely to be provided in that sector. Public sector super funds also have a larger proportion of members in retirement, reflecting the sector’s more mature status.
APRA reports there were over 1.4 million pension accounts in super funds in June 2021.
The average benefit in a retirement pension account across all APRA-regulated sectors was over $330,000. This includes a notional value for defined benefit pensions which have no account balance, but a higher-than-average retirement benefit. The average balance varies across the sectors. The highest average balances are in the corporate and public sectors, where defined benefits were historically more common.
Millions of retiree funds kept in accumulation
Average balances in industry fund pension accounts were higher than in retail funds. One explanation for this could be that the average age of retirees is higher in the retail sector. This could mean that those older retirees did not have the benefit of super for as many years as today’s retirees and so retired with smaller balances.
In APRA-regulated funds, there are many accounts belonging to members who are above preservation age that have not been rolled over into a pension account. In June 2021, there were 2.6 million accounts where the member was over 65 (so they had met at least one condition of release) but only 1.4 million of these were pension accounts. There were an additional 1.5 million accounts where the member was between 60 and 64 and could have met a retirement condition of release; and 250,000 of these were in a pension account. Some of the accumulation accounts will have been held by members who were above the current $1.7 million transfer balance cap and therefore must have two accounts.
Members in retirement who have met a condition of release pay no tax on income or withdrawals from their pension account. So, there were potentially more than two million accounts where tax at a headline rate of 15% per annum was being levied (unnecessarily) on investment income. The question is why? What is driving this behaviour? Is it just an oversight; a lack of engagement; super fund inaction; or older members making a conscious decision to treat accumulated super like a Swiss bank account? The fact is, there doesn't seem to be an answer to these questions.
The split across sectors was quite varied as can be seen in Figure 3. On average, less than one-third of members aged over 65 in an industry fund had their super in a tax-free pension account.
While most pension accounts were held by members over 65, some were for members younger than 65 (i.e. aged 60-64) who had satisfied a condition of release. There were also those over 65 (so satisfying at least one condition of release) who had super in an account in the tax-paying accumulation phase.
It is often lower balance accounts that are left in the taxed accumulation phase. Higher balance accounts are more likely to be rolled into a pension account. The average balance in the pension phase tends to be higher than the average for all accounts for people over 65. The table below shows the average balances in pension accounts and accounts (whether pension or accumulation) held by members over 65.
|Sector||Average member account balance|
|Pension account||Member 65+ account|
Source: APRA Annual Superannuation Bulletin & Fund-level Statistics, June 2021
There was a significant difference between the average balance in a pension account and the average balance of all accounts (including pension accounts) for members over 65. Across the industry sectors, the difference was greatest in the industry fund sector due to the smaller proportion of pension accounts. These funds will have had a higher proportion of lower balance accounts that remained in the accumulation phase.
There was also a skew in the average pension account balances because members with low balances are more likely to withdraw all their super as a lump sum. With the Seniors and Pensioners Tax Offset (SAPTO) allowing a relatively high level of tax-free income, the benefits of tax-free super are less relevant for many retirees – hence the higher rates of withdrawal.
The latest APRA data on super fund balances show that super is delivering more than ever for new retirees. Retirees today have had half their career (if unbroken) with 9% or more of their annual wages or salary contributed to super, delivering a significant asset for their retirement.
Outcomes for members at retirement and beyond will continue to improve. The commencement of the retirement income covenant in July will help members benefit from better outcomes in the decumulation phase of super to go with our world class system of accumulating super. It will be a new opportunity for super funds to distinguish themselves in meeting the needs of their members to spend their super with more confidence that it will last as long as they do.