Superannuation benefits

Release of superannuation benefits

8.105 The SIS Regulations provide conditions for the release of superannuation benefits—that is, when, and in what form, benefits may be accessed by superannuation fund members. Generally—and subject to the superannuation fund’s governing rules—members may access benefits as a lump sum, an income stream, or a combination of both.

When can members access superannuation?

8.106 At age 65. There are no restrictions on the way persons 65 years and over may access their superannuation benefits.^[138]

8.107 At ‘preservation age’ if retired. The preservation age ranges from 55 to 60 years, depending on year of birth:

(a) for a person born before 1 July 1960—55 years; or

(b) for a person born during the year 1 July 1960 to 30 June 1961—56 years; or

(c) for a person born during the year 1 July 1961 to 30 June 1962—57 years; or

(d) for a person born during the year 1 July 1962 to 30 June 1963—58 years; or

(e) for a person born during the year 1 July 1963 to 30 June 1964—59 years; or

(f) for a person born after 30 June 1964—60 years.^[139]

8.108 Accordingly, the preservation age is ‘legislated to increase from 55 to 60 between the years 2015 and 2025’.^[140]

8.109 A person of, or over, the preservation age is considered retired when an arrangement under which he or she was ‘gainfully employed’ has ended and the superannuation fund trustee is ‘reasonably satisfied’ that the person does not intend to become gainfully employed again either part time or full time; or he or she has reached the age of 60 years before or on retiring.^[141]

8.110 There are no restrictions on the way members of, or over, the preservation age can access their superannuation when they retire.^[142]

8.111 Under the Transition to Retirement rules. These rules enable members who are of, or over, preservation age to access their superannuation before they retire. Members may only take superannuation benefits as a non-commutable income stream (that is, an income stream that cannot be converted into a lump sum).^[143] No more than 10% of the account balance may be paid each year.^[144]Members can continue working in any capacity while receiving superannuation benefits under the Transition to Retirement (TTR) rules, as no work test applies.^[145]

8.112 Early access. The Superannuation Act 1976 (Cth) and SIS Regulations provide limited grounds for the early release of benefits, including severe financial hardship and certain compassionate grounds.^[146]

Taxing superannuation benefits

8.113 The tax rate on superannuation benefits depends on a member’s age, whether benefits are taken in lump sum or income stream form, and whether the superannuation fund is exempt from paying tax on contributions and earnings.^[147] Benefits from non-concessional contributions (including spouse contributions) and government contributions and co-contributions are tax-free regardless of these factors.^[148]

8.114 In most cases, persons aged 60 years and over are not required to pay tax when they receive superannuation benefits—irrespective of whether benefits are disbursed as lump sums or income streams.^[149]

8.115 Persons who have reached preservation age but who are under 60 years old can generally withdraw lump-sum amounts up to a ‘low rate cap’ amount of superannuation tax-free.^[150] The low rate cap is a lifetime limit. In 2012–13 it is $175,000.^[151] Amounts above the low cap rate are taxed up to 15% (plus Medicare levy).^[152] Benefits paid as an income stream to persons in this age bracket are assessable income taxed at marginal rates (plus Medicare levy) less a 15% offset.^[153] The Tax Review considered that the taxation of benefits for this age group should not change.^[154]

Transition to Retirement rules: a workforce incentive?

8.116 The ALRC proposes that the Australian Government should initiate a review the TTR rules in light of evidence that they do not meet their underlying policy objective. The objective of the TTR rules is to ‘encourage people to retain a connection with the workforce for a longer period’ by providing flexibility in the rules to access superannuation benefits.^[155] This objective is consistent with this Inquiry’s framing principles of participation and self-agency.^[156]

8.117 By way of background, prior to the introduction of the rules in 2005, workers under 65 years of age generally had to retire before accessing any superannuation benefits. In 2004, the Australian Government noted that this may have led ‘people deciding to retire prematurely just so they can access their superannuation’.^[157] Accordingly, the TTR rules to some extent were designed to address this incentive for early retirement.

8.118 The Australian Government also noted that the pre-2005 laws did not ‘adequately cater for more flexible workplace arrangements where people may choose to reduce their work hours as they get older’.^[158] The TTR rules were intended to facilitate continued employment by providing flexibility—enabling preservation-age persons to reduce work hours and supplement their income with a superannuation income stream.

8.119 A number of stakeholders supported the TTR rules, and a couple also considered them a workforce incentive for mature age persons.^[159] However, in a 2010 report commissioned by the Department of Education, Employment and Workplace Relations, the Melbourne Institute analysed the effect of the TTR reforms. The Melbourne Institute concluded that the TTR rules had ‘no significant effect’ on the workforce participation’ of mature age men and women.^[160]

8.120 Mature age workers do not necessarily use the TTR rules in accordance with their initial design to facilitate continued employment through flexible work. There is a second way to use the rules—by working full-time and increasing superannuation savings. This is an accepted use of the rules—for example, it is described on ASIC’s Moneysmart website as a way to boost superannuation.^[161]

8.121 This use of the TTR rules operates as follows. The TTR income stream enables preservation-age workers:

to salary sacrifice more of their remuneration package into superannuation, with the TTR pension income replacing the salary income they would have received if they did not salary sacrifice. Here, the person’s current lifestyle and cashflow can remain the same and, in effect, the super pension withdrawals can fund superannuation contributions.^[162]

8.122 For those who have met their concessional cap through salary sacrificing, it can sometimes be tax effective to fund non-concessional contributions in this way.^[163] However this use of the TTR rules is limited by the caps on superannuation contributions.

8.123 The above strategy can be utilised by persons who do not intend to retire, but are interested in benefiting from the concessional tax treatment applied to superannuation. Stakeholders were divided in the way they perceived this use of the TTR rules. For example, AIST considered that this strategy provides workers with

a tax effective way of saving more for retirement. It allows many pre-retirees a crucial few years to catch up, particularly post [global financial crisis].^[164]

8.124 The Australian Chamber of Commerce and Industry and AIST considered this use of the rules an incentive for workforce participation.^[165]

8.125 On the other hand, COTA characterised ‘churning of salaries through such schemes’ as manipulation of the TTR rules for tax concessions. It considered that more stringent tests need to be applied for the TTR rules to be effective in keeping mature age workers in the workforce.^[166] The Australia Institute has commented similarly on the TTR rules, noting it is a key way that superannuation is popularly utilised as a tax-planning and tax-avoidance vehicle.^[167]

8.126 Given its Terms of Reference, the ALRC’s primary concern regarding the TTR rules is that they may not meet their policy objective of encouraging continued mature age participation in the workforce. The rules should be reviewed, with a view to their redesign, so they may effectively facilitate this policy objective.

8.127 Such a review of the TTR rules is predominantly an economic project. Consequently the ALRC is not best placed to conduct this review. The ALRC proposes that the Australian Government should initiate a separate review into this issue. The review should consider:

• the use of the rules in practice;

• the relationship to the setting of the concessional contributions cap;

• eligibility criteria for the rules; and

• comparable international schemes.

8.128 A further issue raised in the Issues Paper is that access to the TTR rules may be restricted.^[168] Superannuation funds do not all offer the income stream products that enable members to use this option. In these circumstances, members may need to change superannuation funds if they wish to use the TTR rules. However, stakeholders did not raise this as a specific barrier to access. The LCA noted that the portability requirements—whereby superannuation funds are obliged to transfer or rollover members’ benefits to another fund on request—should, in principle, provide sufficient access to the TTR rules.^[169]

8.129 There may be certain other barriers to the TTR rules. First, some employers do not offer salary sacrifice. Consequently, their employees will not have access to the TTR rules.^[170] Secondly, the ALRC has heard that the TTR rules are more accessible to higher-income workers (who can afford to salary sacrifice) and those with higher superannuation balances than other workers. Thirdly, mature age workers may be unaware of the TTR rules,^[171] and this may affect accessibility. The ALRC therefore considers that the proposed review should also examine whether mature age workers have sufficient access to the TTR rules.

Raising access ages

8.130 In summary, there are three key age settings for access to superannuation benefits:

• preservation age at 55 to 60 years (depending on date of birth), when people can access superannuation benefits at retirement or under the TTR rules;

• the tax-free access age at 60 years; and

• the unrestricted access age at 65 years.

8.131 Another age setting relevant to the discussion is the Age Pension eligibility age. This is set at 65 years. From 2017 to 2023, the Age Pension age will incrementally increase to 67 years.^[172]

8.132 The ALRC is interested in comment on whether the age settings to access superannuation benefits should be increased beyond the legislated increase to the preservation age. In particular, the ALRC seeks submissions on whether the preservation age should be increased to age 62 or 67 years (noting the latter age setting would displace the unrestricted access age at 65 years). A change to the preservation age may have particular consequences for the TTR rules and tax-free superannuation access, as discussed below. The ALRC also seeks comment as to whether the tax-free access age should be raised, as an alternative to raising the preservation age.

Preservation age

8.133 The preservation age rules may encourage people to leave the workforce as soon as they can access their superannuation—although the TTR rules were introduced to ameliorate this effect. Preservation age settings that are too low may also constitute a disincentive to mature age workplace participation due to the message they send about retirement expectations.^[173]

8.134 The Tax Review recommended that the preservation age be increased to 67 years. This aligns with the increase to the Age Pension age, which was also recommended by the Tax Review. The recommendation implies the convergence of the preservation age and the unrestricted access age at 67 years and, potentially, upwards of 67 years—subject to further review by 2020, also recommended in the Tax Review.^[174]

8.135 A preservation age setting that is lower than the Age Pension age enables mature age persons to access retirement income—and consequently retire—prior to reaching the Age Pension age. When the gradual increases to both age settings have been completed, there will be a seven-year gap between them—with the preservation age at 60 years (from 2025) and the Age Pension age at 67 years (from 2023). One reason for the increase to the preservation age—legislated in 1998^[175]—was to reduce the gap between it and the Age Pension age.^[176] However, the changes to the Age Pension age—legislated in 2009^[177]—mean that this gap will be increased by 2 years, that is, from the intended five-year gap to a seven-year gap. The Grattan Institute has commented that

Many workers retire before reaching the pension age and start using their superannuation. … The ability to use superannuation like this weakens the incentive to continue to work until the pension age.^[178]

8.136 Raising the preservation age may therefore be expected to increase mature age workforce participation.^[179] The OECD states that

financial incentives embedded in both public pensions and in other formal and informal early retirement schemes play an important role in determining retirement decisions… These decisions will be influenced by the age at which (early) retirement benefits can be first accessed.^[180]

8.137 The OECD identifies Australia’s superannuation system as an ‘early retirement’ scheme.^[181]

8.138 However, raising the preservation age will increase mature age workforce participation less by encouraging mature age persons to work and more by compelling them to do so. This is because they will be unable to access their retirement income until they reach the increased preservation age. Given the Inquiry’s framing principles of independence and self-agency—both of which encompass the principle of choice, this is an important consideration.^[182] As noted by the LCA, raising the preservation age ‘may force people who would otherwise have retired before then to continue working, even if they have sufficient superannuation to retire earlier’. It argued that this does ‘not recognise legitimate retirement expectations’.^[183]

8.139 Such limitations on choices about work may particularly affect those engaged in hard physical labour who may not want, or be able, to extend their working lives—for example, ‘blue-collar’ and ‘pink-collar’ workers such as construction workers and nurses respectively. The Government of South Australia noted that construction workers ‘are considered “mature aged” at the age of 40 years due to the physical demands of the job’.^[184] Construction and Building Industry Super (Cbus) noted that, in its experience, the ‘dominant factor influencing the supply of labour by older construction workers’ is their

capacity to continue to meet the physical demands of the work. Put simply, increasing … the preservation age will be unlikely to boost participation by older workers.^[185]

8.140 Stakeholders also raised the relative importance of demand and supply factors in determining mature age workforce participation. COTA commented that

If we can get changes to employer attitudes to older workers that mean people can reasonably expect to be able to get and retain a job up to 67 then there would be a case to revisit the preservation age.^[186]

8.141 In the absence of such change, COTA expressed concern that raising the preservation age would consign mature age persons to ‘live on Newstart Allowance and other lower levels of income support for long periods if they lose their jobs’.^[187] Similarly, National Seniors—referring to Australian Bureau of Statistics (ABS) data indicating that the share of long-term unemployed in Australia increased significantly with age—stated:

Unless these barriers are addressed effectively and older workers are able to obtain and retain employment as easily as younger workers, there is a real risk that raising the preservation age will simply lead to a ballooning of the unemployment figures and a greater drain on the social security system, rather than to increased workforce participation.^[188]

8.142 Nonetheless, the ALRC considers that there are some strong arguments for raising the preservation age—most importantly, for the purposes of this Inquiry, that lower age settings reduce workforce participation rates.^[189]

8.143 Arguments supporting an increased preservation age relate to systemic benefits and the public interest. The Tax Review noted that responding to increasing longevity by increasing the preservation age would ‘enhance the acceptability, adequacy and sustainability of the retirement income system’.^[190] It anticipated a ‘moderation of total pension costs’^[191] and a lesser ‘tax burden on those who work’.^[192] The Grattan Institute argued that increasing the preservation age would ‘reduce intergenerational unfairness’.^[193]

8.144 Increasing the preservation age may assist individuals—in addition to reducing potential costs to the Australia Government—by facilitating access to sufficient private retirement funds and reducing the likelihood of exhausting these savings.^[194] Further, and relevant to the focus of this Inquiry, it is easier for mature age persons to continue working than to withdraw from the workforce and later seek to re-enter when their retirement savings are diminished. As found by the Grattan Institute:

Aligning incentives for older people to stay in work seems to be more important than helping them find it. Measures to encourage people to work for longer in life are likely to have the greatest impact on older age workforce participation.^[195]

8.145 An increase to preservation age settings may also ensure that superannuation laws respond to the contemporary reality of increasing life expectancy and ‘healthy life expectancy’—that is, the extent to which additional years are lived in good health.^[196] According to the Australian Institute of Health and Welfare, healthy life expectancy is

increasing for older Australians: in 2009, at age 65, females could expect to live a further 16.1 years without requiring assistance with core activities, and males could expect another 15.2 years without requiring assistance.^[197]

8.146 It is also arguably a legitimate response to another contemporary reality—‘the shift of employment away from blue-collar work to professional and paraprofessional jobs’.^[198] Clearly, however, blue- and pink-collar workers are an important and continuing component of the modern workforce, despite more general trends. To address the circumstances of these workers—who may be unable to continue working into their 60s—the Grattan Institute has suggested they be allowed access to superannuation benefits (or the Age Pension) when they have worked in a nominated industry or meet eligibility conditions for the Disability Support Pension.^[199]

8.147 Finally, delaying the age at which a person can access superannuation income is arguably justified, given that it is in the public interest of improving retirement savings outcomes for individuals. An important component of this argument is that superannuation cannot be conceived of as entirely ‘private’, due to the concessional tax treatment it attracts—at significant cost to the Australian Government.^[200] Indeed, as discussed above, concessional treatment of superannuation is offered in return for deferred consumption (or ‘preservation’)—and, as noted by Professor John Piggott, this may be considered the ‘implicit contract’ underpinning the superannuation system.^[201]

8.148 The ALRC seeks further stakeholder comment on whether the preservation age should be increased and, if so, on the appropriate age setting. There are two principled options regarding the latter issue. An age setting of 67 years, as recommended by the Tax Review, will align the preservation age with the Age Pension age. Alternatively, an age setting of 62 will maintain a five-year gap between preservation age and Age Pension age as the latter rises from 65 to 67 years.

8.149 The ALRC anticipates that any such reform would be implemented gradually over the medium term. Further, any changes to the age setting may be subject to further changes. As noted above, the Tax Review recommended further review of the preservation age setting by 2020.

Consequences of raising the preservation age

8.150 If the preservation age is raised to 67 years, two notable consequences will follow. First, the TTR rules will be displaced, because these rules apply in the gap between the preservation age and age 65 (the unrestricted access age). This would not be an immediate outcome, as the increase to the preservation age is likely to be incremental over a number of years.^[202]

8.151 The displacement of the TTR rules may not be problematic—should the preservation age be increased, the TTR rules are likely to become unnecessary as a workforce incentive. However, improved TTR rules may be a desirable component of the superannuation system in the short to medium term—that is, until the preservation age increase aligns with the unrestricted access age. The Australian Government may also consider that improved TTR rules are worth retaining despite an increase to the preservation age.

8.152 Second, this potential reform would displace the 65-year age setting for unrestricted access to superannuation benefits. The Tax Review did not comment specifically on the unrestricted access age. In its submission, AIST stated that the age setting ‘provides motivation to retire’ and is ‘arguably out of date’ given increasing longevity and the shift from ‘the industrial worker to the knowledge worker’.^[203] If the preservation age is increased to 67, the ALRC anticipates that the two age settings will converge and release of benefits will be permitted no earlier than 67—that is, there will not be an option for release at an earlier age when a person retires. The exception to this are the early release provisions that apply in the limited circumstances noted above.

8.153 The above consequences would not follow an increase to the preservation age to 62 years, as the gap—and the distinction—between preservation age and the unrestricted access age would be maintained.

Tax-free access age

8.154 The age setting for tax-free access to superannuation benefits is due to align with the preservation age when the latter rises to the age of 60 years in 2025. However, if the preservation age is further increased—as discussed above—this will introduce a gap between the tax-free access age and preservation age. This may not have a strong impact on workforce participation, given that mature age persons will be unable to take advantage of the tax-free treatment while under preservation age, except when they are eligible for early release of superannuation.

8.155 The Tax Review did not examine the tax-free access age, as its Terms of Reference directed that it reflect Australian Government policy to ‘preserve tax-free superannuation payments for the over 60s’.^[204] However, the Tax Review noted that the Australian Government ‘may wish to consider whether the age for tax-free superannuation should increase in line with future increases in the preservation age’.^[205]

8.156 An alternative approach is to raise the tax-free access age while retaining the preservation age at 60 years (from 2025). For example, the tax-free access age could be increased from 60 years to:

• 62 years—to maintain the current five-year gap with the Age Pension age when the latter increases from 65 to 67 years;

• 65 years—to align with the unrestricted superannuation access age; or

• 67 years—to align with the Age Pension Age.

8.157 This may provide an incentive for persons who have reached preservation age to delay accessing superannuation benefits until they reach the tax-free access age—consequently remaining in the workforce for longer.

8.158 Raising the tax-free access age is a softer approach than raising the preservation age, as it allows mature age persons to access superannuation benefits at age 60 years (rather than, for example, 62 or 67 years) if they choose to do so. In other words, it uses the ‘carrot’ of tax incentives rather than the ‘stick’ of raising the age at which a person can access their retirement savings.^[206] This may be more consistent with this Inquiry’s framing principles of independence and self-agency. Other alternatives to raising the preservation age are discussed below.

Alternatives to raising the preservation age

8.159 This section discusses, but does not propose, restricting lump-sum access to superannuation benefits. The Grattan Institute has stated that, given political resistance to increases to the preservation age, ‘second best’ alternatives might be considered:

These might include quarantining a significant proportion of superannuation balances until pension age, or only allowing withdrawal of a limited income stream (rather than a lump sum before reaching the pension age).^[207]

8.160 In its submission to the Inquiry, AIST argued that the ability to withdraw tax-free lump sums of superannuation should be modified ‘with some minimum (either dollar or percentage of balance based) being compulsorily allocated to a retirement income product’.^[208]

8.161 The issue of restricting lump-sum access was previously considered by the Tax Review. It did not recommend such a measure, stating that flexibility in the use of superannuation benefits enables people ‘to make decisions in their best interests and is likely to result in outcomes largely consistent with the broader objective of promoting retirement saving’.^[209]

8.162 Further, the Tax Review noted that people ‘already draw down their assets in an orderly fashion’,^[210] and that ‘evidence suggests that people make conservative decisions on how they use their assets in retirement’.^[211] Retirees’ use of lump sums has been captured in ABS statistics:

Many of those who received a lump sum payment used it to pay off or improve their existing home or purchase a new home (34% of men and 27% of women), to buy or pay off a motor vehicle (16% of men and 11% of women), or clear other outstanding debts (13% of men and 13% of women). Some reinvested their lump sum payment into a bank account, personal savings or other investment (23% of men and 20% of women), or an approved deposit fund, deferred annuity or other superannuation scheme (21% of men and 17% of women).^[212]

8.163 Given conservative use of assets in retirement, it would appear that lump sum access may not be substantially more likely to constitute a ‘pull’ into retirement than other forms of superannuation benefits. Further, restricting lump sum access may have adverse effects on mature age persons—limiting their ability to use superannuation benefits in a manner tailored for their personal retirement needs. Another potential adverse consequence is reflected in the Super Systems Review:

In countries with compulsory annuitisation, members … can be locked into lower income streams if markets fall shortly before their retirement as the value of the annuity is based on the value of their lump sum and market conditions on retirement day. In contrast, Australians can continue to invest in growth assets after retirement and thus potentially benefit from subsequent market upswings.^[213]

8.164 Additionally, there is an impediment to measures restricting lump sum access. The retirement income product market is ‘under-developed’^[214]—an issue dealt with in both the Tax Review and the Super Systems Review.^[215] The Tax Review considered this a ‘structural weakness’ in Australia’s retirement income system.^[216] It found that the Australian Government should support the development of products that allow people to manage longevity risk, and better facilitate the private-sector provision of such products.^[217]

8.165 Given the above factors, the ALRC does not make a proposal to restrict lump-sum access to superannuation benefits. It may be appropriate to revisit this issue in the medium term if future mature age cohorts draw down their retirement assets less conservatively than current cohorts—assuming a more developed income product market in Australia.