‘Why must I take a super income if I’m happy living on a full pension?’

Q: Why does the government discriminate against non-working people who are over Age Pension age about putting money into superannuation? I’ll use myself as an example. I am 67, single, own my own home, am no longer able to work, have $110,000 in super and am on the full pension. If I had a job, I would be able to make after-tax contributions to my super. I’m pretty frugal in the sense that I don’t go on lavish holidays and I love picking up free items, doing them up and selling them for a nice sum. I am required to take out 5 per cent of my super, however I’ve lowered this to 2.5 per cent for this year and next financial year, in line with the rule change as a result of Covid-19. My question is, why do I have to take money out of my super if I don’t want it? And why can’t I put money into my super, at least up to my income/asset limit, which would be around $240,000 as advised after a recent Centrelink visit?

A: An excellent question. I prefer to avoid getting into a political debate about the superannuation system in Australia, however, it is supposedly designed to encourage the accumulation of money up to Age Pension age to limit the dependence of the population on the pension in the longer term. The exception is those who decide not to retire and continue in the workforce after Age Pension age.

I can see the logic in this arrangement and I can’t see any likelihood of it changing in the foreseeable future. In other words, you would need to be gainfully employed to contribute to super other than using the ‘downsizing’ option.

If you sell your house and move to a less expensive property you can contribute up to $300,000 to super notwithstanding your age. Additionally, I note you have an account-based pension which requires you to withdraw a minimum amount each year. I have the same arrangement and like you, I reduced my minimum pension this year 2.5 per cent. You may have the option of moving some or all of your pension back into the accumulation phase of super, thus removing the need to make a minimum pension withdrawal each year. You should check with your superannuation provider if this is an option.

There is an important downside to this decision, however. Whilst the money is in the account-based pension there is no tax payable on the earnings. If you move the money back to the accumulation phase you will pay 15 per cent on the earnings. Without knowing more details of your superannuation arrangements, it is difficult to know whether you may be better off or worse off by moving money back into the accumulation phase just to avoid having to draw down a minimum pension.