Super is not only for retirement

Like it or not, hundreds of thousands of Australians use their superannuation as more of a tax-advantaged savings vehicle than a source of retirement income.

At a 2015 CSIRO and Monash University Superannuation Research Cluster, a study reported that 90% of the amount an average retiree enters retirement with (including the family home and non-super) remains unspent upon their death.

In a recent 2022 survey by National Seniors and Challenger of 3,345 members, more respondents reported they would 'maintain most or all of capital' than 'spend all capital to fund retirement', as shown below.

Intention to maintain capital in retirement (n=2713)

As expected, those with over $500,000 in retirement savings have a significantly higher intention of maintaining their capital.

Intention to maintain capital according to wealth (including super but not the home) (n=2361)

When asked why they are maintaining capital, 41% nominated 'for beneficiaries'.

On whether retirement savings are a nest egg or income stream, the Report concludes:

"Super capital was not meant to accumulate and remain unused. In practice, however, many people only spend earnings from their super to preserve the capital or take the required minimum drawdown. This can reduce available spending money by as much as 30%.

The results of this survey align with the observations made by the (Retirement Income) Review that many retirees do not want to consume their super as income. Only 1 in 3 people were intending to draw down their capital to generate income from super in retirement."

Is that first sentence correct? When in the first two decades of SG did Keating, Costello, other Treasurers and Treasury advocate that all super balances must be exhausted in retirement?

Diving deeper into SMSF and super balances

Consider the latest SMSF data, recently released by the Australian Taxation Office for June 2020. There is a significant lag due to delays in SMSF tax reporting, and the amount will be higher now. The ATO data reveals $854 billion (of the $3.3 trillion in super) was held in 605,000 SMSFs for 1.1 million members.

As shown below, 17.1% of funds held over $2 million in assets, equal to about 103,400 funds for 188,100 people. This data focusses only on SMSFs as they are likely to hold the largest super balances, but in addition, total super data from the ATO shows 575,000 people with annual incomes above $180,000 hold an average of $575,000 in super each.

As most people enter retirement as a member of a couple, and it's likely if one partner dies, the entire balance will pass to the other, the data indicates there are at least 200,000 Australians with access to super balances of $2 million or more and far more with $1 million plus.

Any way these numbers are cut, an enormous number of Australians have more money than they will use to finance their retirement. In the National Seniors data, 81% owned their homes outright with a further 11% owning with a mortgage. It is likely that their homes are worth more than their super, as well as owning considerable other assets. Given the tax efficiency of super, it is prudent to use non-super assets (other than the family home) before drawing on super.

Large balances can still accumulate

The caps imposed on contributing to super will go some way to eliminating the mega balances of $5 million or more, but they still allow significant wealth to be stored in super. For example, current rules allow:

$1.7 million in a pension account ($3.4 million for a couple) subject to no tax on income and withdrawals
No limit to the size of accumulation accounts taxed at 15%
Non-concessional contribution cap of $110,000 a year
Concessional contribution cap of $27,500 a year

Plus various schemes such as carry forward concessions and downsizer payments (of $600,000 a couple) which do not count towards the contribution caps.

Well-paid executives using these amounts over a long career will accumulate multi-million superannuation accounts long into the future. For example, invest $100,000 at the start and add $120,000 a year for 20 years compounded at 5% gives a balance over $4 million.

In research from Investment Trends, 18% of people over 40 who have not yet retired expect to limit drawdowns for income to ensure most super can be left as an inheritance. Fully one quarter of retirees are already doing this.

Cutting the data by super balances, even among retirees with less than $500,000 in super, 24% plan to leave most money as an inheritance. At larger balances, the proportion rises as high as 31%.

Superannuation specifically acknowledges bequests

Superannuation legislation has specific features designed for appropriate bequeathing. Binding Death Nominations (BDNs) ensure superannuation is distributed according to the wishes of the deceased member, not at the whim of another trustee of the fund or executor of the estate. Superannuation is not an asset of the estate and a trustee is not obliged to follow directions in a will, even if super is specifically mentioned in the will. The instructions in the BDN define the money flow.

The superannuation rules facilitate bequests to non-dependants. There is no restriction on withdrawing money from superannuation for anyone who has reached preservation age and satisfied a condition of release (including retiring). However, on death, if it is given to anyone other than a spouse or a dependent child, there is a tax (on the taxable component) of 15% plus the Medicare levy (currently 2% for most people). The obvious approach is to gift it before death, if possible.

Again using Investment Trends research, large proportions of people in every wealth bracket intend to leave substantial parts of their estate to beneficiaries, and in some cases, the total value of all investments.

The system was designed to allow large balances

Treasurer Jim Chalmers has made defining an objective of superannuation a priority, saying at last year's Superannuation Lending Roundtable:

“We see the lack of a legislated objective of super as a source of ambiguity which left the gate open for early access, and so we will legislate one.”

Treasurer Chalmers will define the objective of superannuation as 'providing income in retirement' or similar, ignoring the fact that both Labor and Liberal Governments designed a system which allowed people to accumulate more than they need.

Unless some much stricter legislation is passed such as requiring all balances over a certain amount to be removed from super, hundreds of thousands of Australians have no intention of running down their super to one dollar on the day they die.

As Keating said, "I wanted a system where the individual retained the capital."

Labor badly misjudged the opposition to its policy on restricting franking credit refunds but would be on safer ground with most voters if superannuation were capped at a high amount, say $5 million per person. There is no knowing, however, how much extra tax this would generate as the very wealthy have other tax minimisation techniques.

Go ahead, clarify the objective of superannuation, but don't expect those with large balances accumulated by the completely legitimate (and government sponsored) use of the system to change their plans. Their spending intentions extend beyond their lives and beyond their graves. For many, the objective will be flogging a dead horse.