Get ahead by maximizing tax-free earnings after you retire
04 October 2024
5 min read
Many Australians assume that super has done its job by the time you stop work. But did you know that more than 50% of the income you receive in retirement can be generated from the investment earnings you get on your super after you've retired*? Here’s how to set up your super for maximum earnings momentum.
Australians are labouring under a misapprehension when it comes to retirement: many people think their super has done the bulk of its work by the time they retire, when in fact, the best may be yet to come.
Recent CFS research found one in three Australians in early retirement remain disengaged with their super#.
And last month we revealed that one in two Australians aged over 65^ make the simple mistake of leaving their money in their taxed super account rather than switching it to a tax-free account-based pension.
People often focus on super in the accumulation phase, leading up to retirement, without a clear picture of how super performs after they stop work.
Your super begins its real work in retirement
If you’ve been focusing only on the lump sum total you need to have accumulated in your super by the time you retire, you might be under the impression that this is when your super’s growth journey ends.
In fact, that’s when it’s only just beginning to do its real work.
Of course, it is important to understand how much super you’ll need by the time you stop working to support the retirement lifestyle you want.
But it’s equally important to understand the returns your money can generate in retirement, and how these compare to the returns your super generates over the course of your working life.
Let’s break it down.
More than 50% of your income can be generated from earnings after you've retired
Super invested in a tax-free pension account – also known as an account-based pension – can generate between 50% and 60% of your total income in retirement from earnings after you’ve retired.
CFS modelling* shows:
only 16% of the payments received from an account-based pension during retirement comes from the super contributions made while someone is still working.
the lion’s share (84%) of a person’s total payments from an account-based pension comes from the investment returns they get on their super savings both before retirement and in retirement.
more than half (51%) of a person’s total pension payments comes from the returns they get on their super savings after they retire and start an account-based pension.
The ‘snowball effect’ of super in retirement creates maximum momentum
While the amount of investment returns (84%) may seem very large compared with your original contributions (16%), it may help to picture your super as a snowball rolling down a long, steep hill.
Your contributions are the small snowball you start with at the top of the hill.
The much larger snowball you’ll end up with at the bottom is mostly made up of the additional snow you picked up along the way.
That additional mass is made up of the investment returns you get on those original contributions plus the returns on those returns, compounding over time.
Your returns end up making up a much larger proportion of your snowball than just the contributions themselves.
That gives your money the chance to gain maximum earnings momentum.
Account-based pensions generally offer higher investment returns than super accounts
As we explained last month, switching your money to the tax-free environment of an account-based pension instead of leaving it in super can save you thousands of dollars a year**.
This is because super is taxed at rates of up to 15%, while money in an account-based pension account is tax-free once you turn 60 and satisfy a condition of release, such as ceasing work or changing your job.
Whatever money you don’t spend remains invested, generating compounding returns.
Pension accounts may generate more than you take out
While it’s important that your pension investment is protected from market volatility in the early years to give it the maximum chance to compound and grow, many retirees have a relatively long investment horizon of 20 years or more.
That means a portion of many people’s pensions are often left invested in similar assets to super accounts over time, to maximise returns over the longer term.
You must receive at least a minimum amount of income payments from your pension account each year. Known as the minimum drawdown amount, this is recalculated each 1 July based on the minimum drawdown percentage for your age and your account balance on that date.
However, these drawdown amounts may be outpaced by the returns your pension account generates, depending on the option you choose and market performance. The median 10-year return to June 2024 for pension accounts with 21%-40% allocation to growth assets was 4.8% per year, according to data from independent research firm Chant West. For pension accounts with a higher proportion of growth assets, the median returns would be higher.
In contrast, if you are aged under 65, you’re only required to withdraw 4% a year of your account-based pension balance. This increases to 5% if you’re aged 65-74.
If you leave your money in a super account, you will not need to withdraw a minimum amount each year – but, as mentioned, the investment returns you get on that account will be taxed.
There are other benefits to choosing to invest your super in an account-based pension.
Find out more on our website, or book a free consultation with our guidance team.
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The mistake costing retirement-age Australians
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# CFS surveyed 2,019 Australians aged 18-plus who hold either a superannuation account, or investments in their name, between 6 and 13 June 2024.
^ Source: APRA Quarterly Superannuation Industry publication, Table 7: https://www.apra.gov.au/quarterly-superannuation-industry-publication and APRA Annual superannuation bulletin – superannuation entities, Table 8a (as at June 2023)
* Calculations by CFS. Projection starts at age 25 (with salary of $100,000), retirement at age 65 and super lasts until age 92. Superannuation earnings, tax on earnings, investment and administration fees, and yearly indexation of contributions and income stream payments, are based on the default assumptions used in ASIC’s Moneysmart calculator, available at moneysmart.gov.au as at August 2024.
** See The simple mistake costing retirement-age Aussies thousands in tax
Avanteos Investments Limited ABN 20 096 259 979, AFSL 245531 (AIL) is the trustee of the Colonial First State FirstChoice Superannuation Trust ABN 26 458 298 557 and issuer of FirstChoice range of super and pension products. Colonial First State Investments Limited ABN 98 002 348 352, AFSL 232468 (CFSIL) is the responsible entity and issuer of products made available under FirstChoice Investments and FirstChoice Wholesale Investments.
Information on this webpage is provided by AIL and CFSIL. It may include general advice but does not consider your individual objectives, financial situation, needs or tax circumstances. Tax considerations are general and based on present tax laws and may be subject to change. You should seek independent, professional tax advice before making any decision based on this information. You can find the target market determinations (TMD) for our financial products at www.cfs.com.au/tmd, which include a description of who a financial product might suit. You should read the relevant Product Disclosure Statement (PDS) and Financial Services Guide (FSG) carefully, assess whether the information is appropriate for you, and consider talking to a financial adviser before making an investment decision. You can get the PDS and FSG at www.cfs.com.au or by calling us on 13 13 36. Past performance is no indication of future performance.