Wealthy retirees feast on another super rort

Kevin Davis, Emeritus Professor of Finance at the University of Melbourne, has shone a bright light on another superannuation tax dodge for wealthy retirees:

On May 29, the government announced by way of media release the extension of an emergency COVID measure.

The temporary halving of minimum drawdown rates for retirement superannuation accounts — introduced in March 2020 while the Australian stock market was in freefall — would continue for another year.

The explanation was terse and does not stand up to scrutiny.

The biggest beneficiaries of the extension are the wealthy retirees, who use super to escape tax on funds they are building up to hand on to their children.

It provides no benefits to less well-off retirees who need to use money in super to live on in retirement.

Before the temporary halving of drawdown requirements in March 2020, a retiree aged between 65-74 would be required to withdraw at least 5% of their account balance each year.

The minimum withdrawal rate increased with age.

The merit in the requirement (even if the numbers used have an unavoidable element of arbitrariness) was that it limited the ability of wealthy retirees to use super as a pure tax dodge.

Super is meant to be for retirement

Funds in super retirement accounts have a zero tax rate on earnings and are untaxed when withdrawn…

The explanation in the media release is little more than unsubstantiated waffle:

“Today’s announcement extends that reduction to the 2021-22 income year and continues to make life easier for our retirees by giving them more flexibility and choice in their retirement.

For many retirees, the significant losses in financial markets as a result of the COVID-19 crisis are still having a negative effect on the account balance of their superannuation pension”.

The second sentence certainly warrants scrutiny.

APRA statistics show that in the year to March 2021 the rate of return for institutional super funds was 18.2%

This is well in excess of what was required to reverse the temporary loss in the March quarter of 2020 that prompted the original decision…

Super as a tax dodge

But the rationale for the drawdown requirement was to limit the use of super as a wealth maximisation strategy for the benefit of heirs.

The purpose of super is meant to be to provide income security and a reasonable standard of living in retirement.

That’s what the 200-page report of the retirement income review commissioned by Treasurer Josh Frydenberg told him in November.

The key beneficiaries of the extension will be the well-off who already get the most benefit from Australia’s super system.

Retirees who need super to live on won’t benefit in the least.

All this will mean is that wealthy retirees will accumulate bigger nest eggs to pass onto their heirs via tax free inheritances. This contradicts the recommendations from Treasury’s Retirement Income Review, which wants retirees to spend their nest eggs:

Inheritances are significant, representing the transfer of wealth from one generation to another. They are not distributed equally and increase inequity within the generation that receives the bequests. Most people die with the majority of wealth they had when they retired. If this does not change, as the superannuation system matures, superannuation balances will be larger when people die, as will inheritances. Superannuation is intended to fund living standards of retirees, not to accumulate wealth to pass to future generations…

For example, assuming no change in how retirees draw down their superannuation balances, superannuation death benefits are projected to increase from around $17 billion in 2019 to just under $130 billion in 2059 (Chart 3H-5)…

Although inheritances can help people to prepare for retirement, they are distributed unequally, with wealthier people tending to receive larger inheritances than those with lower wealth (Chart 3H6). Inheritances therefore increase intragenerational inequity…

All of which goes to show that superannuation is more a tax minimisation scheme for the rich than a genuine retirement system.

Unconventional Economist


  1. I don’t think this follows:

    All this will mean is that wealthy retirees will accumulate bigger nest eggs to pass onto their heirs via tax free inheritances.

    Wealthy people will always have a nest egg to pass on. It’s not like reducing the minimum to be paid out of super reduces this because it can be saved outside of super (which is what always gets ignored).

    The real issue is that it just enhances Howard’s great gift of tax free investment income inside of super during the pension phase. The less you take out, the more you accumulate in a tax free environment (while spending your savings outside of super).

    So while I agree that the measure is unnecessary, it is for different reasons.

    • Jumping jack flash

      “…because it can be saved outside of super…”

      It’s like the government thinks that since it dreamed up the whole super idea that nobody saves money any more outside of super.
      I’m sure that is the case for a lot of people, but not everyone.

      • Mining BoganMEMBER

        Yeah, reckon there’s a lot more distrusting super these days so have a secret squirrel account in case the gubmint grabs super to prop up spending on evangelical barns.

    • PlanetraderMEMBER

      Except to the extent that you start the pension with wholly tax-free funds. The growth on these in pension phase go to dependents tax free I am pretty sure so reducing pension on these pensions means more growth and therefore higher tax-free pension.

      • I think we broadly agree on that point. What I was getting at is that Davis’ complaint seems more about the reduction in the minimum drawdown meaning that retirees won’t spend as much and instead leave it to their kids. I was suggesting that that isn’t really what would happen as retirees with a lot of money will be able to fund their retirement expenses from other sources. But yes, it doesn’t leave more capital in a no/low tax environment.

    • Even StevenMEMBER

      Normally I’m in 100% agreement with you Jason, but I find your logic slightly peculiar here. The quotation in italics is correct. Maybe it’s just late and it’s been a long day for me.

  2. Just as lil Johnny said, we like to leave a little something for the children. The tax free fund in AustSuper is only 1% better than the accumulation fund, so haven’t bothered to partake of that rort. Suggest we include family home in asset tests.

  3. Mining BoganMEMBER

    Yeah, well, if this is how it is then wait to fix it until after I retire. Like 15 years after.

    I won’t care by then. I’ll have had my go at being a greedy old coot.

  4. In nz, uk, usa etc there is no means testing on pensions. By comparison for aus this means most couples with assets living to 87 need to provision an additional 700k to get through retirement relative to other countries. I for one need all the tax breaks i can get to manage that.

  5. Most SMSF retirees will still have to withdraw, as a superannuation payment, much more than the amount, as calculated, in the extension of the concessional 50% reduction in the statutory drawdown. (2.5% instead of 5% for ages up to 74).
    The average account balance of all individual SMSF members according to the latest ATO statistics is $678,621, although this figure is skewed by members with very large balances. The median balance (half of all members have a balance higher and half have a balance lower) is a more modest $408,237. Thus a 2.5% drawdown on the average account balance is $16,965 over a year . Doesn’t sound much to me. Drawdowns will be considerably greater than this amount unless one elects to live like a hermit !!! This negates somewhat the argument that the extension of the 50% concession is a retiree rort!!

    • No actually your point only reinforces the argument! Poor people will still need to take out the full old minimums (so 5% for 65-74 yr olds). However, the truly rich don’t usually need the 5% of their $5M nest egg, thereby allowing them to amass greater tax free (or at least concessionally taxed @ 15%) nest eggs.
      The truly rich always have fully taxable assets outside Super, that couldn’t get squirelled away into the tax advantaged Super system, to live off if required. They don’t need the 5% minimums to live off. So this is a big free kick for them.