Super phase vs pension phase and how it impacts your retirement

Nov 26, 2021 | Investment, Retirement, Superannuation

Paying attention to your super is important. It is definitely worthwhile as for most people it will be one of their biggest assets. It is likely to potentially provide all or the majority of your income when you can access it and are ready to retire.

One aspect of superannuation which is not all that well known is the “pension phase” or “phase of superannuation”.

When you are working and money is being contributed to your super by employer and yourself that is known as accumulation or “super phase”.

When you can finally access your super, i.e. you reach preservation age which is probably around 60 for most of us and you meet the condition of release i.e. stop work, you can turn it into “pension phase”. Some super funds may call that an “income account” or something similar.

This begs the question, why would you want to do that?

Firstly, you can specify the amount of money you want to receive from your “income account” and have it paid into your bank account. You might make it a payment every fortnight or month.

Secondly, you don’t pay any tax on the income earnt by your investments and there are also no capital gains tax.

That means that with the tax effectiveness, the returns of your investment in “pension phase” is sitting around 10-15% higher than had it been kept in accumulation, your “super phase”.

The following chart shows the returns of Australian Super’s balanced fund in accumulation “super phase” compared to that of “pension phase”.

The two graphs show how the tax effectiveness in “pension phase” (in yellow) enhances your returns.

Chart provided by Lonsec iRate

Chart provided by Lonsec iRate

Basically, what you’re essentially doing before retirement in your “super phase” is having your employer contribute your superannuation, possibly top it up yourself with a sweet tax benefit, then letting time and compound interest do their thing. Then, once you are eligible to access your super, you switch it up to “pension phase” and access your money tax free.

It’s the perfect formula for a comfortable retirement!

About the author

Simon Duigan is an Independent Financial Advisor and owner of Core Independent Financial Advice (Core IFA). Core IFA is proud to be the first and only Tasmanian business to be approved by the Profession of Independent Financial Advisers (PIFA). This means Core IFA is independent and receives no commissions or benefits from any product providers or financial institutions. Instead, you can be confident that Core IFA have your best interests at heart.


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