Superannuation funds have quietly started paying retirement ‘bonuses’
Australians entering retirement could lose thousands of dollars by failing to check if their superannuation fund offers a retirement “bonus”, as industry and retail funds quietly launch incentives to help them compete with self-managed super funds by mimicking their tax advantages.
Nearly 30 per cent of funds, including 10 of the nation’s biggest, now offer products dubbed retirement bonuses, according to SuperRatings, although the terms and conditions attached vary wildly.
The bonus idea, pioneered by QSuper (now Australian Retirement Trust) in 2016, comes as super funds face heightened scrutiny over how well they look after members in the retirement phase. Australian Retirement Trust has paid out nearly $100 million so far and industry experts expect the trend to accelerate.
The bonuses are paid to people when they move from accumulation to retirement phase to return an approximate value of the tax that had been set aside to pay potential capital gains liabilities. Capital gains are taxed between 10 and 15 per cent within super, compared to marginal tax rates as high as 45 per cent. There is no legal requirement to compensate super savers for CGT tax withheld.
And while the products are marketed as refunds of tax that had been set aside to pay potential capital gains liabilities (which are extinguished once they hit the zero-tax pension phase) financial advisers and super fund executives are split over the fairest way to calculate the bonuses.
Vince Scully, the chief executive of financial advice firm Life Sherpa, says a growing number of clients are asking about the bonuses, suggesting the phenomenon is catching on.
Super funds that offer bonuses or rebates when members retire
*Subject to change, other conditions may apply
Scully says that for those approaching retirement, there is a “distinct advantage” to rolling their accumulation phase super into pension phase with an existing fund if a bonus is offered.
“If you take your accumulation fund, and move it to a new super to take out a pension, you don’t get your bonus,” he says.
If somebody wants to take out a pension with a different fund, it may be worth them commencing their pension with their current fund, picking up the bonus, waiting out the relevant clawback period – generally 12 months – and then switching, Scully says.
Most funds do have some form of clawback provision, which means members lose the bonus if they move out of the fund within a given period. Other funds require you to have been with them for a certain amount of time – also typically a year – to be eligible for a bonus.
Bonus, booster, reward
AustralianSuper paid out $13 million in “retirement boosters” in the 2023 financial year to 7700 eligible customers.
Insignia-owned MLC says it has paid an average $2000 per member since it began offering its “pension bonus” in February 2022.
TelstraSuper paid $2.5 million to members in the 2023 financial year, with the bonus capped at $8000 per member.
Brighter Super’s “retirement reward” is capped at $9500.
Leading actuary Michael Rice says retirement bonuses are “clever devices” because the money is only paid out to members if they start an account-based pension with the same fund.
He says the products reflect public offer funds’ awareness of one key advantage SMSFs have: they can wait until all members have retired (and therefore pay zero tax) before selling assets.
“I know of a [SMSF] case where a husband and wife made a profit of $1.3 million on an initial investment of $200,000 in one security,” he says.
“The fund had 80 per cent in pension accounts, so the CGT was 20 per cent of 10 per cent. That is 2 per cent of the gain.
“The APRA-regulated funds recognise the advantage of an SMSF for tax purposes and are trying to counter this – but not very successfully, as they don’t have the records to calculate it properly at member level.”
SuperGuide, a super and retirement planning website, gives the example of a couple, Marieke and Terry, who have been members of the same fund for 20 years and each have $350,000.
While Terry has remained in the balanced option the whole time, Marieke has switched options frequently and only entered the balanced fund six months ago.
Retirement funds bonus by transfer amount ($)
When they retire, Terry’s $350,000 balance triggers a retirement bonus of $3500, reflecting the approximate 1 per cent of his balance that had been held aside to pay future – but ultimately unnecessary – capital gains tax.
Because Marieke had only switched recently, she gets $350 because there wasn’t as long for capital gains to accumulate.
SuperGuide founder Robert Barnes anticipates bonuses will be offered by most, if not all, funds over time.
A spokesman for REST notes the fund’s customers are more likely to be female and have worked in care and retail roles and, as such, aren’t as likely to have the funds generally deemed adequate to set up an SMSF.
REST says its bonus is a way to provide “greater equity” and give more cash to people who are likely to be retiring with less than the national average.
But funds use all sorts of different calculations to arrive at a bonus amount.
AustralianSuper calculates its bonuses for each individual based on the purchase and sale of assets throughout the life of the account. A more general approach involves allocating bonuses based on a flat rate percentage of the balance being transferred to pension mode.
Member equity?
“With AustralianSuper, the higher the accrual for unrealised capital gains that has occurred for their investments, the higher the ‘Balance Booster’ will be,” says head of member products Shane Hancock.
“This is fairer from the flat rate approach provided by some other super funds. Members with no accrual for unrealised gains, like those in a cash investment option or with negative or low returns during their investment time, would receive no Balance Booster.”
KPMG tax partner Damian Ryan says while the bonuses are a nice perk for those entering pension phase, it could come at a cost to members still in accumulation phase.
That’s because without a bonus scheme in place, the small tax benefit attached to members moving to pension phase would be spread out across the broader membership pool. This adjustment is made by small changes to unit prices.
“In the past, a fund would true up the deferred tax in unit prices, compared with the fund at a whole,” he says. “All the members with deferred tax accrued in their unit price would have enjoyed the benefit of a proportional reduction [when someone entered the pension phase].”
Most funds disagree, saying the overall sum paid out in retirement bonuses is not significant enough to affect the unit price. Brighter Super, for example, says the amount paid out in the 2023 financial year reflected 0.01 per cent of assets, and as such would have had only a “negligible” impact on unit prices.
Spirit Super notes that super funds have a choice whether to return tax paid by members when shifting from accumulation to pension phase, or to distribute the tax benefits across member cohorts via the unit prices.
At any rate, switching super at retirement needs to be carefully considered, and preferably contemplated well in advance of retirement, Scully says.
“The real thing is that you should really be thinking about your super at least a decade out from retirement.”
Chris Brycki, founder of investment platform Stockspot, says anybody considering switching funds needs to remember fees are one of the two biggest determinants of super balances, the other being correct asset allocation according to member age.
According to the Productivity Commission, a 0.5 percentage point difference in fees could cost a typical full-time worker about 12 per cent of their balance by retirement. That’s about $100,000, significantly more than what most funds offer in retirement bonuses.
“This isn’t free money,” Brycki says. “This is just your money they’re refunding. Just in any other time in your life, you wouldn’t go off and intentionally pay bigger fees just to get a bigger fee refund.”
