While SMSF members typically receive personalised financial advice that guides them to transition at the optimal time, many APRA regulated fund members including industry super funds, corporate super funds and company super funds, remain in the accumulation phase for too long, missing out on crucial tax benefits and ultimately reducing their financial security in retirement.
The accumulation phase allows individuals to build up their superannuation balance over their working lives through contributions and investment growth. However, once members reach retirement age, remaining in the accumulation phase means continuing to pay taxes on investment earnings—taxes that could be avoided by transitioning to the pension phase.
In the pension phase, investment earnings can be tax-free, dependant on Total Super Balance (TSB) of the member significantly boosting retirement income. Yet the Class report shows that as of 30 June 2023, over half (51.22%) of APRA regulated fund members aged 65 and over remained in the accumulation phase, compared to just 6.76% of SMSF members. This stark contrast underscores the power of superannuation advice and highlights how many super fund members, including industry super funds and retail fund members, are missing valuable tax-saving opportunities.
The financial cost of staying in the accumulation phaseThe financial implications of remaining in the accumulation phase once retired can be dramatic. In this phase, superannuation investment earnings are taxed at up to 15%, meaning members lose a significant portion of their returns to taxes. By moving to the pension phase, earnings can become tax-free dependant on total super balance, leaving retirees with more income to draw from in retirement.
According to the 2024 Class Annual Benchmark Report, the average retirement income stream for SMSF members over the age of 65 is $46,267, nearly double the $23,287 received by APRA regulated fund members.
Sarah has access to a financial advisor who, upon her retirement, recommends transitioning to the pension phase. By doing so, Sarah’s annual $75,000 in investment earnings becomes tax-free, allowing her to keep the full amount each year. Over 10 years, Sarah earns $750,000 in tax-free income.
John, however, doesn’t receive the same level of financial guidance and remains in the accumulation phase after retiring. As a result, his $75,000 in earnings is taxed at 15%, reducing his yearly income by $11,250. Over 10 years, John loses $112,500 to taxes, leaving him with only $637,500—$112,500 less than Sarah.
If we extend this scenario over 20 years, Sarah’s tax savings grow even further, amounting to $225,000 in additional income compared to John, whose earnings continue to be reduced by taxes.
In spite of the introduction of the Retirement Income Covenant in 2022, which requires superannuation funds to develop strategies to help members maximise their retirement income, many APRA regulated super funds have been slow to act. According to Professional Planner, regulators have expressed growing frustration with the pace of implementation, with APRA deputy chair Margaret Cole calling it "astonishing and highly concerning" that industry super funds and retail funds are not meeting their obligations fast enough.
The Retirement Income Covenant mandates that super funds support members in moving from the accumulation phase to the pension phase, ensuring they make the most of tax-free earnings. However, the Class report reveals that a significant portion of industry super funds and retail super fund members are still being left in the accumulation phase, missing out on potential tax savings. In contrast, SMSF members, who often receive tailored superannuation advice, are more likely to transition at the right time, avoiding unnecessary taxes.
Given the slow response from many industry and retail super funds, members cannot afford to wait for their super funds to fully implement the strategies mandated by the Retirement Income Covenant. The cost of staying in the accumulation phase for too long is too high. Instead, members should take control of their financial futures by seeking personalised advice from a qualified financial advisor.
A financial advisor can help you navigate the complexities of superannuation and ensure you transition into the pension phase at the right time, avoiding unnecessary taxes and maximising your retirement income. The difference between receiving advice and going it alone, as seen in the case of Sarah and John, could mean tens of thousands—or even hundreds of thousands—of dollars in additional income over the course of your retirement.
The disparity between the outcomes of SMSF and APRA regulated fund members highlights the urgent need for super funds to bridge the advisory gap. SMSF members, with access to financial advice, are able to make better-informed decisions about their retirement, transitioning at the right time to maximise tax savings and retirement income.
ARRA regulated super fund members often lack this level of personalised advice, leaving them vulnerable to financial missteps, like staying in the accumulation phase for too long. Super funds must offer more comprehensive advice services or educational programs to help their members navigate the transition effectively. Until these programs are fully implemented, members should seek out independent advice to ensure they are not caught in the accumulation phase trap.
For super fund members, understanding the impact of the accumulation phase trap is key to making better decisions about retirement planning. A Super Review can help you assess your current superannuation balance, identify tax-saving opportunities, and ensure that you are on track to maximise your retirement income stream.
A Super Review provides valuable insights into your retirement strategy and helps you avoid common mistakes that could cost you thousands of dollars in unnecessary taxes. With expert guidance from Findex financial advisors, you can ensure you transition from the accumulation phase to the pension phase at the right time and protect your financial future.
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