Lack of advice hurting over 65s in accumulation phase

In its 2023 Annual Benchmark Report, launched at the Class Ignite event in Sydney on Wednesday, the SMSF software company found that there is a significant gap in the amount of SMSF members enjoying tax-free earnings in retirement phase compared with APRA fund members.

In contrast to APRA funds, where 49.1 per cent of members aged 65 and over still have their entire balance in accumulation phase, only 12.2 per cent of Class SMSF members over 65 have their entire balance in accumulation.

“The majority of Class SMSF members of this age group are taking advantage of tax savings by moving balances into retirement phase income streams to maximise their retirement benefits,” the report said.

In contrast, many APRA fund members are missing out on tax savings through what Class called a “lack of awareness and engagement by the members”. The firm also referenced the APRA and ASIC Implementation of the retirement income covenant report, in which the regulators described the “lack of progress and insufficient urgency from RSE licensees in embracing the retirement income covenant to improve members’ retirement outcomes”.

Class said that it puts a spotlight on the need for industry to educate members on the benefits of moving into pension phase after they reach retirement age.

Tim Steele, chief executive of Class, said: “The data in this report highlights that SMSF members are more likely to enjoy tax-free earnings in retirement phase compared to APRA fund members, as almost one in two members over 65 in APRA funds still have their entire balance in accumulation phase.

“While this in part reflects the higher levels of engagement in the SMSF sector and likely the value of having access to financial advice, it also highlights that the superannuation sector collectively needs to do more to identify and service the retirement income needs of members.”

The Benchmark Report also points out that these members with APRA funds not only missed out on a tax exemption they would have received if they had started their retirement phase income stream at 65, but are also continuously paying tax for earnings on assets in accumulation phase.

“This can be justified if there is a valid reason to stay in accumulation phase. For example, some members aged 65 and over have maxed out their Personal Transfer Balance Cap in their super fund and are required to keep any remaining balances in accumulation phase with a fund of their choosing,” it said.

“There may be an opportunity for some Class SMSF members over the age of 65 that are still in accumulation phase (12.2 per cent in FY22) to engage with a financial adviser to ensure they are maximising their retirement benefits.”

Writing in the report, Joshua Williams, chief operating officer at SuperGuardian, said that the need for strategic superannuation advice has never been greater.

“Yet such advice seems harder to come by, and all too often, the basics are being overlooked. Australians need help with their superannuation, and for the discerning advisers who are willing and able to provide strategic superannuation advice, opportunities abound,” Mr Williams said.

He added that advisers should be looking to engage with members that may not realise they aren’t maximising their retirement earnings.

“Of the 2.78 million APRA fund members aged 65 and over at 30 June 2022, only 1.41 million members were in tax-free pension phase. This includes those under 65 who may have satisfied another condition of release, such as retirement or ceasing employment, so 50.9 per cent may in fact be optimistic,” Mr Williams said.

“If I were an adviser, I’d be getting straight on the phone to book in a meeting with these members to highlight how much they’re generously donating to the ATO and, by extension, their fellow Australians.”