A wave of older Australians, estimated at around 700,000, is unknowingly paying 15% tax on their retirement savings when they could be accessing it tax-free. The main issue is a technical but little-known rule that requires retirees to notify their super fund that they have left the workforce. Without this notification, their money stays in what is called the accumulation phase and remains taxable even when they are no longer earning income.
This problem is expected to worsen quickly. Annual retirements are forecast to double from 150,000 to 300,000 due to Australia’s ageing population. The rise in retirees is putting pressure on systems that are not set up to support such growth. The current framework places the responsibility on each individual to move their super to the pension phase, where super income becomes tax-free for most. However, many retirees are unaware of this vital step.
Industry leaders have warned that low-balance retirees are the most vulnerable to this tax trap. These individuals may not have access to financial advice or may not keep up with changes to the rules. In contrast, wealthier or more engaged investors are often better informed and can make the transition without paying unnecessary tax. Current regulations prevent super funds from advising members on how to manage their accounts, even when such advice would clearly benefit the member.
A new report from the Super Members Council, which represents industry super funds, outlines a possible solution. One key proposal is to automatically move eligible members to the pension phase at age 65 unless they choose to opt out. The Council’s analysis, based on new data reviewed for the first time since 2020, highlights how 700,000 people have been caught by this issue.
The findings also debunk the common view that retirees are hoarding super to leave behind tax-free inheritances. In reality, 64% of retirees with tax-free super accounts are already taking out more than the government's minimum drawdown requirements. This is particularly true for those with less than $50,000 in super. These figures suggest that most people are using their retirement savings as intended rather than trying to exploit the system.
As Australia prepares for a growing retiree population, fixing this aspect of the super system could protect many from unnecessary tax and make the retirement process simpler.
