Plan to help retirees spend their ‘stranded’ superannuation carries $1b budget hit

A proposal to move retirees out of taxed superannuation accounts could cost the government about $1 billion a year, but supporters say it would leave older Australians better off and paying less tax.

The proposal by the Actuaries Institute targets “stranded balances” — super held by Australians aged 65 and over in accumulation accounts, generally taxed at 15 per cent, instead of tax‑free retirement phase products.

The institute estimates 1.56 million people over 65 collective hold $326 billion in these accounts, costing over $2b in tax per year.

“We need to normalise drawing down from super so more people can live with dignity in retirement,” report co-author Nick Callil said.

“There is clear inertia when it comes to drawing down income, driven by the complexity of the decisions retirees are being asked to make.”

The centrepiece of the actuaries’ proposal is a new product called MyIncome. Under the plan, APRA-regulated funds would have to offer members the retirement income product from age 65.

“We prefer a nudge rather than prescription,” co-author David Knox said. “On your 65th birthday you’ll receive an in-your-face offer: now’s the time to take your income. Here’s what you need to do.”

The choice to switch would still be up to the retiree until the age of 75, the paper suggested, where transferring to income would become mandatory.

But the proposal comes with a direct hit to the federal budget.

The institute says if half of those stranded balances — or about $160b — were moved into retirement income products, the resulting fall in tax collected from super funds would be “in the order of $1b per annum”. It notes that against total expected super fund tax revenue of $30b in 2025-26.

That fiscal trade-off is likely to sharpen scrutiny from Treasury and government, particularly as Canberra weighs how far it should go in nudging retirees to spend super the way the system was intended.

A spokesperson for Assistant Treasurer and Financial Services Minister Daniel Mulino said the government welcomed ideas from across the sector, but signalled it was focused on improving retirement outcomes within the existing framework.

“With more than 2.5 million Australians expected to retire in the next decade, strengthening the retirement phase of superannuation is a key focus for Government,” they said.

Mr Knox argued the hit to the budget would be offset by retirees spending their super balance.

“The extra income spent will foster economic activity and increase the amount of tax received thereby negating the net impact to the budget,” he said. “And that’s not considering the immense social benefit of retirees having more money in their bank account.”

Mr Callil said he’s aware there’s a “spectrum of views” in the industry, but said there are some super funds that are “attuned to the proposal”.

Importantly, super funds will be given flexibility to design the account under the proposal to suit their members.

“We’re not wanting to stop funds engaging or communicating with members, but I think it’s fair to say for a range of reasons – English as a second language or financial illiteracy for example - many funds aren’t communicating with their members clearly.”

For the proposal to become reality, the paper said legislation would need to be drafted and a transition phase to be implemented.

“It’s still early days . . . three or four years away at the earliest,” Mr Callil said.

“But the mindset change can start now.”