Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 506

The impact of superannuation on retirement outcomes

(This article is an extract from a longer report linked at the end).

Superannuation is substantially improving retirement incomes for nearly two million retired Australians by providing regular income streams. Australian Bureau of Statistics (ABS) data also indicate that in 2019-20 around 580,000 households, encompassing over 1 million Australians, were mainly dependent on payments from superannuation. This is nearly double the number of households mainly dependent on superannuation in 2009-10. For those dependent on superannuation income, around 75% of such households have less than 20% of their income from government pensions. Many more retirees also have benefitted by taking lump sum benefits either at retirement or during retirement.

Putting super income payments into context

By 2021-22, there was a total of $59 billion in superannuation income payments in retirement, (Table 1), which is greater than the annual Age Pension expenditure of around $51 billion in that year [DSS 2021-22 Annual Report].

Table 1: income stream payments from APRA funds and SMSFs (a)

(a) Figures from APRA Annual Superannuation Bulletin June 2022, Excel version Table 2

Historically the Age Pension has been the main source of income for most retirees in Australia. Government pensions and allowances were the most common main source of income for the 3.9 million retirees in Australia in 2018–19 aged 45 and over (49% for men, 44% for women), followed by superannuation (30% for men, 17% for women).

Yet this is beginning to change with increasing superannuation balances and with more retirees relying mainly on superannuation. As shown by Table 2, in 2021-22 (for funds with more than six members) there were around 1.37 million people who received regular income from account-based income streams. There also were 99,000 people receiving annuity payments (both term and lifetime) along with 159,000 individuals receiving defined benefit pensions, (mostly related to former public service employment). The total amount of pensions paid by funds with more than 6 members increased from $28.4 billion in 2014-15 to $40.4 billion in 2021-22.

A further 81,000 people received transition to retirement pensions in 2021-22. These pensions have become less popular due to changes in their taxation treatment. In 2016-17 there were 162,000 individuals receiving such pensions from funds with more than four members.

Table 2: Superannuation income streams, 2021-22 (a)

(a) Payments from funds with more than 6 members. Source: APRA Annual Superannuation Bulletin

There also are very substantial numbers of people (over 330,000 in 2019-20) receiving income stream benefits from Self-Managed Superannuation Funds (SMSFs). SMSFs have a substantial proportion of their membership in the retirement phase.

The average income stream benefit paid by an SMSF was around $47,900. This is significantly higher than the average for APRA regulated funds, reflecting the higher average account balances in SMSFs. Income stream payments in 2019-20 would also have been affected by the temporary reduction in minimum draw down rates. The minimum annual payment required for account-based pensions and annuities, allocated pensions and annuities and market-linked pensions and annuities was reduced by 50% for the 2019–2023 financial years.

Vast majority draw down almost all super

The evidence available indicates that in most cases individuals draw down entirely on their superannuation during retirement rather than leaving a substantial amount for a spouse or children. The Association of Superannuation Funds of Australia (ASFA) 2021 paper findings are confirmed by more recent ABS data which indicate that in 2019-20 for those aged 75 and over, only 41.7% of males and 29.5% of females had a superannuation account balance or were receiving income from superannuation (which would include receiving a defined benefit pension which cease on death).

Table 3: Percentage of older Australians with superannuation

(a) Includes persons with a superannuation account balance above zero and/or receiving regular income from superannuation and/or who received a lump sum superannuation payment in the last two years
(b) The number of persons with superannuation coverage expressed as a percentage of total persons in the corresponding group (age and sex)

ATO sample file data indicate that in 2019-20 for the 2.9 million Australians aged 70 and over, only 540,000 had more than $1,000 in superannuation, around 310,000 had more than $200,000 and only 180,000 had more than $500,000. Most of the higher balances are held by members of SMSFs. In 2019-20 there were around 115,000 members of SMSFs aged 70 and over receiving income streams and with balances over $500,000.

However, overall, 90% or more of those aged 70 and over pass away with little or no superannuation, having drawn down on their balances after their retirement.

That said, some individuals do have significant balances in superannuation. In 2019-20 around 35,000 individuals had more than $3 million in superannuation, with around 90% of them in SMSFs. The number is expected by Treasury to grow to around 80,000 by 2025-26.

Growing super assets ease burden on government

As well, the large and growing pool of superannuation assets is positively influencing both adequacy of retirement incomes and sustainability of government expenditure on the Age Pension.

As a result of increasing superannuation account balances, at Age Pension eligibility age an increasing proportion of retirees have substantial private incomes, which increases retirement incomes, decreases the proportion of retirees who receive a full Age Pension and increases the proportion who receive no Age Pension at all.

Already there has been a fall in the percentage of new Age Pensioners who are on the full Age Pension and an increase in the percentage who at the time of retirement are fully self-funded.

As shown by Table 4, only around 40% of the age group 66 to 69 currently receive the Age Pension.

Take-up rates vary between each State and Territory, largely driven by differences in average superannuation balances. For instance, in the Australian Capital Territory coverage of superannuation and average superannuation balances are higher than the national averages. There also is a relatively high incidence of defined benefit pensions in the Australian Capital Territory.

Table 4: Age Pension recipients by state and territory by age group, December 2021

Source: Department of Social Services Demographic Data, ABS Population Estimates

In 1997, the take-up rate for the Age Pension and the age-related Veterans Pension for those aged 65 and over was 79%. By 2007, this had fallen to 75%. As shown by Table 4, it is now around 65% for those eligible by age to receive the Age Pension. If the take-up rate for the Age Pension in 1997 applied to the Age Pension in 2021 there would be around 550,000 extra Age Pensioners, increasing the cost of providing the Age Pension by about 20%.

As people age, their receipt of the Age Pension generally increases. This makes sense as older age groups had less or no time in the compulsory superannuation system. Superannuation balances also generally decline with age as balances are drawn down.

However, greater wealth is associated with longer life expectancy so there is a small decline in the relative incidence of accessing the Age Pension after age 90 for the relatively low number of Australians in that age category. As well, most individuals aged over 90 are single and subject to the relatively tighter asset test for singles.

The take-up rates for the Age Pension will decrease further as superannuation balances increase and if the trend for more people to remain in paid work after age 65 continues. The decrease in take-up will be particularly marked for those in their late 60s.

Currently just under 20% of those aged around 67 are still in paid employment with a further 40% or so self-funded (or at least not eligible for the Age Pension).

Currently around 30% of couples and singles reach or exceed the ASFA Comfortable Standard and projections indicate that the superannuation system as it matures will play a crucial role in improving retirement living standards. By the year 2050 ASFA projections indicate that around 50% of retiree households will be able to afford expenditure at the level of ASFA Comfortable or above.

Australia relies less on the Aged Pension than other countries

Consistent with ASFA projections, projections published by the Retirement Income Review (RIR) indicate that by the year 2060 around 50% of the Age Pension population group will be totally self-funded. Of the 50%, around 40% will be part-rate pensioners. In comparison, currently only around 35% of the total Age Pension population are self-funded with only around 32% Age Pension recipients on a part-rate pension.

As a result, according to the RIR report, Age Pension expenditure as a percentage of GDP is expected to fall moderately over the next 40 years, from 2.5% in 2020 to 2.3% in 2060. This is despite the population over Age Pension eligibility age being expected to grow faster than the working-age population, leading to fewer working-age people for each person of Age Pension eligibility age.

Across the OECD, expenditure on publicly funded pensions averages 8.8% of GDP and is projected to increase to 9.4% by 2050. Some European countries already have four times the level of Australian expenditure, with this projected to rise further. Those countries where expenditure on public pensions is expected to increase (in the absence of reform) include Canada, Germany, New Zealand, the United Kingdom and the United States. In contrast, as noted earlier, Australian expenditure is already relatively low as a percentage of GDP and is expected to decline.

As shown by Chart 1, the growth in the percentage of retirees reaching ASFA Comfortable (largely through the growing maturity of the compulsory superannuation system) is accompanied by a fall in the percentage of retirees who receive a part or full Age Pension.

Chart 1: Projections of reliance on the Age Pension and also for reaching ASFA Comfortable Retirement Standard

Source: Department of Social Services demographic data and ASFA estimates. Note: Per cent of retirees on Age Pension and per cent achieving ASFA Comfortable do not necessarily add up to 100%. Some retirees at ASFA Comfortable or above will receive the Age Pension after drawing down on their superannuation.

Consistent with this, the maturing compulsory superannuation system has led to a substantial increase in households that are mainly dependent on superannuation rather than being mainly dependent on the Age Pension (Chart 2).

Chart 2: Number of households mainly dependent on superannuation income

The impact of additional tax on super balances over $3 million

The tax concession enjoyed in relation to investment earnings for high balance members is substantial for large accounts. Based on ATO data, in 2019-20 there were around 35,000 superannuation fund members with balances within superannuation of over $3 million. Treasury projects the figure will be around 80,000 in 2025-26. Some of these funds have balances of some hundreds of millions of dollars, well in excess of retirement needs. The Treasury estimates suggest that the average additional tax paid by the individuals affected would be $25,000 a year.

While the current caps on superannuation contributions limit the ability for members to build up excessive balances in the future there is a real question regarding the appropriate treatment of high balances that were achieved in the context of more generous contribution caps in the past. Large capital gains on business and/or real property asset holdings are also an issue, particularly for SMSFs. These have not been impacted to a great extent by changes to contribution caps as the increase in account values has been driven by capital gains rather than contributions.

The Transfer Balance Cap regime limits the amount a member may take into pension phase. However, ‘excessive’ balances may still be present in accumulation accounts and therefore will be subject to a current tax concession of up to 30% of the tax on earnings (that is, 45% personal tax rate less 15% tax on fund earnings).

Treasury has estimated that changing the taxation treatment of investment earnings related to total superannuation balances in excess of $3 million would lead to additional revenue of around $2 billion a year, although the exact amount raised would depend on how excess balances were invested after they were withdrawn from the superannuation system. This figure of $2 billion would reduce the total tax concession applying to superannuation contributions and investment earnings by around 4.5%, and by 9.5% in regard to investment earnings alone. This clearly is a substantial impact.

In regard to who would be affected by such a cap, broad demographic information on holders of large superannuation accounts is available from the ATO sample file for 2019-20 and from SMSF taxation statistics.

These statistics indicate that around 65% of those affected by the proposal are male. Those affected are relatively old, with around 50% aged over 70 and around 90% aged over 60.

Even though the age groups affected are relatively old, only around 50% are retired, with around 30 receiving wage or salary income.

Labourers and unskilled workers are not represented in those affected by the measure. The ATO statistics suggest that of those likely to be affected around 20% currently identify as managers, around 10% as a professional, around 5% clerical or administration, around 2% as consultants. However, as noted above many of those affected are retired with no data available about former occupations.

Those likely to be affected are relatively affluent on a number of measures. Around 25% owned a rental property, around 25% received dividends of over $40,000 a year and around 15% had total income for tax purposes of over $500,000.

The majority of those likely to be affected live in Sydney and Melbourne, but there are significant proportions living in Brisbane, Perth and Adelaide. Only a relatively small proportion of those likely to be affected live in regional areas of Australia.

 

Ross Clare is Director, Research and Resource Centre at The Association of Superannuation Funds of Australia Limited (ASFA). Read the full report here. This article is general information and does not consider the circumstances of any person.

 

15 Comments
Bilbo
April 30, 2023

All people who pay income tax in UK and NZ get some pension; not Australia.
However migrants' parents after being supported 10 years in Australia, can get the pension having never paid Australian income tax.
Meanwhile many Australians who have paid income tax for decades get nothing.

Dudley
April 30, 2023

"Meanwhile many Australians who have paid income tax for decades get nothing.":

Ross Clare provided me with data and opinion that the Age Pension costs the Commonwealth ~$55 billion / y. Super taxable income is ~$140 billion, exempt income is ~$40 billion.

My rough computation is that providing a 'universal' Age Pension would cost the Commonwealth roughly an additional $50 billion.

The additional ~$50 billion could be avoided by reducing Age Pension by roughly $25% with 15% tax on disbursement ('pension') account income or the additional ~$50 billion could come from ~30% tax on all super earnings.

I did not consider increasing the Age Pension eligibility age, residency status, claw back of Age Pension through income tax. Doubtless the additional cost of a 'universal' Age Pension could be reduced with some tax rate jiggling.

Seems to me the that Age Pension for the wealth-less is wel-fare and all tax payers should pay for it as for other welfare.

'Universal' Age Pension for the wealth-more is better-fare and only those saving for a better retirement should pay for the better retirement of others.

Those two systems can be seamlessly integrated through tax paid on super income, including disbursement account income.

Currently the amount of super income is near but not sufficient to implement at generally acceptable tax rates. So immediate implementation would require tax rates, pension rate, residency status jiggling.

Which leaves the middle wealthers to pay for the current system by drawing down their capital as a substitute for the full Age Pension.

Eleanor Martin
May 03, 2023

Bilbo I wholeheartedly agree with you.!!! you worked hard, earned the dollars, paid the high taxes and unappreciated for your contribution to the government coffers. You get nothing back for being a good citizen. Nothing. You get rewarded for spending up and living off welfare. As simple as that. And they are still after us. You saved and to leave something for your children and now they want it instead. More tax and on uncapitalised gains when the market can drop tomorrow. Its insane and highly discriminative....or as you could say, a kick in the guts.

Linus
November 06, 2023

everyone is entitled to it at retirement age, migrant or not.

Martin
April 30, 2023

If AFSA have evidence indicating that in most cases individuals draw down entirely on their superannuation during retirement rather than leaving a substantial amount for a spouse or children, why are the Government & the media complaining that Superannuation has become a taxpayer funded inheritance scheme ?

Mark
April 30, 2023

The writer mentions 70 and 75 year Olds whom typically don't have a lot of Superannuation to begin with.

Retirement income review found the trend is for people to use the income from Superannuation to support retirement lifestyle but are reluctant to use the capital.

Baby Boomers and GenX have higher balances than the Boomers and will be in a better position to do this.

That being said, quite a few Baby Boomers and GenX are heading into retirement years still holding a mortgage and will use Superannuation to pay down their mortgage.

Jim Bonham
April 30, 2023

The Retirement Income Review based their conclusion on a misreading of the research they quoted, using data which excluded super accounts which had been exhausted.

See https://saveoursuper.org.au/do-retirees-hoard-their-superannuation/ for a detailed argument.

Craig Johnson
April 29, 2023

The taper for pension payments for people who have managed to save and contribute to super with balances over a meagre 400k is totally unfair for somebody who has paid tax all their working life...
The part pension for a couple with one not eligible through age is totally unfair given 2 people have to survive on about 200 less than what a single pensioner
The fact that somebody may live in a caravan park in a cabin ( land lease ) and pay management fees and still be classified as a homeowner rate of pension is another reason politicians are in no concept of the lower classes battle to survive...

Julian
May 21, 2023

Totally unfair. For a couple with a home, pension assets above the max so no government pension, with estimated return on pension fund of 5% the "marginal effective tax rate" due to the taper is about 150%.
A temptation is to spend the excess capital, but then the fund may not be self sustaining.
Until I read that the analysis of superannuation and tax includes the taper, includes the full life cycle of superannuation, I will be suspicious of any conclusions.

Peter
April 28, 2023

Issue: Retirees are running out of superannuation during retirement. If the retiree has also experienced some cognitive/physical decline it may be difficult for that person to access a government pension. Family, friends and any legal power given to others to manage your affairs may no longer be relevant due to changing circumstances. What happens to that retiree? Does their incomes simply decline to the point where the retiree becomes destitute.

Andrew Smith
April 28, 2023

Good analysis, explaining how pensions will taper off acting as the last resort &/or supplementary vs. superannuation and income streams kicking in; too many Australians near retirement are ignorant on super and/or pension income.

Many, especially in Australia, are led to believe we have high 'immigration' but in fact high 'churn over' or 'NOM net migration' of temporary 'net financial/budget contributor' residents e.g. international students, temp workers, backpackers, self funded long term residents; but actual permanent migration is capped at modest 200K p.a. in kids.

Meanwhile the working age of peak spending, investment and tax paying, has passed the 'demographic sweet spot' vs. more retirees; this dynamic is overshadowed often by dog whistling of (undefined) immigration and population growth, inc. those outlets following the Austrian School....

The balance is right in taking future pressure off budgets, giving income streams to retirees and pension, to supplement those with lower retirement income.

This is opposed to many nations inc. Europe whose future retirement income sustainability will be challenging with ageing populations, decline in working age and many unprepared for increasing budget pressures need for health care, education etc..

Dudley
April 27, 2023

Ross, what is the:
. current cost of Age Pensions (with current means tests),
. current cost if all age eligible received the Age Pension (without means tests),
. current revenue from Super contributions and earnings tax,
. current Super disbursement ('pension') account earnings (within account, not amount disbursed)?

From which it would be very simple to calculate the tax rate required for taxes on Super disbursement account earnings to fully pay for either:
. cost of additional Age Pension payments to make age pension 'universal',
. cost of all Age Pensions.

In other words: What Super tax rates would result in Super taxes being equal to additional or total cost of 'universal' (non-means tested) Age Pension?

The benefit of abolition of the Age Pension means test is to eliminate the tapering of Age Pension payments which result in drastically smaller real incomes for retirees having assessable assets around the Asset Test cutoff and 7.8% year incentive to dump 'excess' assessable assets, especially in home.

SMSF Trustee
April 27, 2023

The Grattan Institute and others need to read this and stop comparing the tax cost of low/zero taxes on earnings with what government age pension payments are and compare with what they would be if self-funded people drew the pension. This article shows that the budget cones out ahead!
Put another way, reduced old age pension entitlements ARE a tax on self-funded retires and that should be taken into account.

Tom taylor
April 28, 2023

As ex SMSF trustees, the wife and I saw the writing on the wall when Morrison the then treasurer brought in the $1.7m cap. It was only a matter of time before the Labor put the boot to SMSFs. The reality is both parties have gutted the best system (smsf) for a large segment of population that was growing.

Michael2
April 29, 2023

The accounting they are using to determine how much superannuation tax breaks cost the nation just seems too simple

 

Leave a Comment:

     

RELATED ARTICLES

Uncomfortable truths: The real cost of living in retirement

10 reasons owning your home beats super in retirement

Yes, ‘millionaires’ can qualify for the age pension

banner

Most viewed in recent weeks

An important Foxtel announcement...

News Corp's plans to sell Foxtel are surprising in that streaming assets Kayo, Binge and Hubbl look likely to go with it. This and recent events in the US show the bind that legacy TV businesses find themselves in.

Welcome to Firstlinks Edition 578 with weekend update

The number of high-net-worth individuals in Australia has increased by almost 9% over the past year, and they now own $3.3 trillion in investable assets. A new report reveals how the wealthy are investing their money.

  • 19 September 2024

The challenges of building a portfolio from scratch

It surprises me how often individual investors and even seasoned financial professionals don’t know the basics of building an investment portfolio. Here is a guide to do just that, as well as the challenges involved.

Creating a bulletproof investment portfolio

Is it possible to build a portfolio that performs well in any economic environment? So-called 'All Weather' portfolios have become more prominent of late, and this looks at what these portfolios are and their pros and cons.

What's left unsaid in Australia's housing bubble

The current difficulties confronting housing policy partially stem from an explosion of mortgage debt. We've engineered a price for housing that will cause a severe problem for future generations – if it isn't addressed.

Which asset classes are a bargain now?

Many assets have enjoyed a positive year, leaving some of them looking pricey. Here we compare valuations of cash, bonds, stocks, and property, and suggest where investors may be able to find opportunities.

Latest Updates

Retirement

The quirks of retirement planning with an age gap

A big age gap can make it harder to find a solution that works for both partners – financially and otherwise. Having a frank conversation about the future, and having it as early as possible, is essential.

The everything rally brings danger and opportunity

Most market players today seek quick rewards and validation of opinion. Outsiders willing to combine new technology with old-fashioned patience and focused analysis can prosper.

Investment strategies

Portfolio construction in the real world

Building a portfolio is like building a house. This framework can help you move towards your goals without losing sight of reality or leaving yourself vulnerable to market storms.

Shares

Feel the fear and buy anyway

In this extract from his new book, the co-founder of Intelligent Investor reveals how investors can avoid critical mistakes and profit from opportunities in collapsing share prices.

Investment strategies

The risks of market concentration and not staying invested

MFS chief investment officer and CEO elect Ted Maloney talks market risks, similarities between Trump and Harris, and the most important thing investors can do to avoid destroying value.

Gold

Gold's important role as geopolitical tensions rise

Equity markets have traditionally struggled at times of sustained geopoltical tension. Gold, on the other hand, has thrived and can provide investors with protection against "unknown unknowns".

Strategy

The changing face of finals footy and the numbers behind it

A well-meaning AFL rule change in 2016 seems to have had unintended consequences. The top teams might cry foul but AFL bosses are unlikely to be too miffed about the outcome.

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.