Could you get a retirement bonus?
This week we learn what retirement bonuses are, how they're calculated, and whether they are really as cool as they sound.
In this edition
Feature: Could you score a retirement bonus?
In this weekend’s newspapers: Have you heard of retirement bonuses? Here’s how to get one
The Course: The new Spring Edition now open for booking
From Bec’s Desk: By stealth
Prime Time: The outlook for investments, interest rates and inflation in the year ahead with Shane Oliver
Could you score a retirement bonus?
Are they really as cool as they sound?
The concept of receiving a retirement bonus from your superannuation fund sounds cool, doesn't it? It's a lump sum payment that lands in your account as you transition from the accumulation phase to the retirement phase. Today I want you to understand them, and I want you to be able to explore whether they are really as cool as they sound.
About 40 percent of Aussie superfunds are giving cash bonuses to their members as they move from an accumulation account or a transition to retirement account (TTR) in an effort to ‘do what’s right’ for their members. But not many people know about them, or understand how they’re calculated; and not all funds are doing them, and they’re certainly not all doing them the same way.
So this week I spoke with a few funds and dove deep into the different ways they are promoting, calculating and providing retirement bonuses, and now, I’m breaking them open in an effort to make them a little easier to understand.
As you approach and enter the retirement phase of superannuation you move from paying 15% tax on the income your superannuation fund generates in the accumulation phase, and discounted Capital Gains Tax on growth, to paying no tax at all in the retirement phase. None! Zip! Zero! Zilch! No income tax, no CGT on assets held over the long or short term. Nothing.
Superannuation funds that are invested in assets in the accumulation phase put aside money to pay those taxes. It’s called ‘provisioning’ - an accounting term. And they can build up quite a healthy tax provisioning account. But, when you move from accumulation to retirement phase, that tax is no longer required to be paid and it certainly no longer needs to be provisioned by your fund. So, the fund can either absorb the amounts they have provisioned on your behalf into that that year’s returns, and put it back into the pool to benefit all members; or they can pay that amount that has been provisioned on your behalf back to you as a lump sum or ‘bonus’ when you retire.
As I said above, about 40 percent of funds are choosing to pay it back to members from what I can tell, at the moment, the others are absorbing the provisioning back into their pooled funds to benefit all members. I expect the bonus will become more common as the retirement phase offerings of superannuation get juiced up in what is gradually becoming a competitive market, knowing many people are reviewing their superannuation fund’s offering in pre-retirement, comparing them and switching.
Many of the funds that are choosing to pay it back to you as a lump sum have cleverly turned it into a marketing opportunity, branding it up as a rather sexy sounding ‘retirement bonus, booster or reward’ or similar and hanging their topline amounts, if they can, up in lights – and good on them! They’re doing something good for you - they should be able to promote it. It’s up to you to work out whether your fund’s approach is worthy of applause.
Retirement bonuses are more tricky to understand than a simple cash handout. They’re also difficult to compare because different funds are doing them differently. And, if you look harder at them, you’ll realise that one cash windfall as you retire is not the be-all and end-all if your fund is outperforming in investments and keeping their fees down over the long term. It’s just one thing to consider in the bigger picture of what your fund delivers. Let me explain why.
How are funds calculating retirement bonuses?
Retirement bonuses are being calculated and offered in two very different ways.
Type 1: Pooled provisions
One way of doing it is by pooling all the provisioned capital gains and income tax amounts for the people who have retired during that year and, once the final tax is calculated, defining how much is in the provisioning account. Then carving that up equally to all the people who have retired during that period calculated as a percentage on the balance they move into their new, freshly opened, retirement phase account.
This is the easiest type of retirement bonus to explain and advertise - because it is offered to a member as a percentage of their balance at retirement and everyone who opens a retirement income stream gets the same percentage. The percentage amounts are revised annually. If a fund has had strong capital growth and provisioned for that tax, when lots of members roll into the retirement phase, it can leave a healthy pool. This is the approach being taken by Australian Retirement Trust, MLC and Brighter Super among others. In some ways it sounds ‘fairer’ but in reality, the people who were in high growth funds would have had more tax provisioned for them in the accumulation phase than the people who were in bonds and cash investments. So, it is not technically fair to each individual member to pay all members equally. Many funds get around this by restricting access to the bonus to only people invested in growth assets - and leave cash investors out of the opportunity to get a bonus. But, some pay all members the same, regardless of their investment types.
The percentages being offered, quite publicly by these three funds are appealing - with MLC releasing a 1.25% bonus for their 2023/4 financial year, Brighter Super offering 0.8% and ART offering 0.5%.
Type 2: Individual provisions
The other way to do it is by calculating the bonus based on each individual’s unique fund position, using a set of criteria. This is being done by industry funds like HESTA and Australian Super, taking into account which options each member is invested in at the point where they shift into retirement, how long they have been invested in their current investment options, their balance history in each investment option, how much they transfer into their new retirement income stream, and, alongside this, just like the above, considering the Fund’s tax position at the time they transfer into a retirement income stream. This sounds much harder to understand, but, in all reality, it probably allows the people who have been invested in growth assets for a long time and therefore provisioned at a higher level to receive a benefit that is larger than the person who has been more conservatively invested or only been with the fund for a short time, not building as significant CGT provisions.
In both cases the money is paid to your super account automatically, when you move from an accumulation or TTR account, and it is paid outside your concessional contributions. But there’s a few watchouts. Sensible ones I think, designed to stop people from ‘gaming’ the retirement bonus, or switching to try and get one then leaving.
All funds have a caveat that if there’s a period with negative performance, in which they won't be provisioning for income tax or CGT, they won’t pay a retirement bonus - so don’t count your chickens before they hatch. Most funds only implemented their bonuses in the last five years, so we’re yet to see this play out publicly.
They also all have an eligibility period, that is, they won’t pay someone who joined their fund in the last six or 12 months. Some funds require you to be invested in ‘growth assets’ in the 12 months prior to retirement, with many disqualifying the amounts in your account that are held in cash, and sometimes government bonds as the provisioning is minimal on these. Most funds only offer a bonus once, even if you transfer more money from your accumulation account to retirement phase later, because they are about ‘provisioned tax’ not incentivising deposits. But this is not the case for all funds with some choosing to offer a bonus as a percentage each time you roll an amount into your retirement income stream account. And finally, some funds say they will claw back the bonus if you leave within twelve months, others see this as too hard.
So what happens to the money if your fund doesn’t pay a retirement bonus? Does it mean you’re missing out?
If a fund has elected not to pay a bonus, but rather, to absorb the tax that has been provisioned for you and not paid, back into their member investment account, that’s not necessarily a bad thing. Invested well, those millions of dollars that could have been paid out to people at retirement but weren’t, should impact fund performance to the upside for all members and, over a long term period you should see the benefit of this every year in your investment returns in accumulation. This is especially relevant to understand if you have a few years ahead of you before you retire where you are really leaning on your funds performance for growth. I would expect funds without a bonus, if they have an average or above average number of people retiring in their member base, to have strong ongoing topline investment returns because they’re absorbing the benefits of tax provisions.
You won’t see this unless you take the time to review the one, five and ten year returns of your fund against the returns of funds that offer a retirement bonus into future years; and that relies on your fund being a top-performer anyway. Quite possibly, with the number of people retiring as a percentage of fund’s member bases still quite small, the impact will not be significant yet - but with massive waves of people approaching retirement in the next five years, the impact of absorbing the provisioned tax back in might be more visible.
The real consideration
The average superfund balance between the ages of 65-69, which is when most people retire, is $453,075. That would yield a retirement bonus at the highest advertised rate I can find of 1.25 percent from MLC’s Master Trust of $5663. At 0.8 percent, Brighter Super’s 2024 rate, that’s $3,625, and at ART’s advertised rate of 0.5% that’s $2265. HESTA, which calculates bonuses individually, reports an average payment of over $2,100 while Australian Super reported their average at $2,600. When asked about their top bonus payment for 2023/24, MLC reported a top payment of more than $22,800, Brighter Super said theirs was over $15,200, ART’s was $9,500, and HESTA says their largest payment exceeded $18,000.
On a real basis though, if your fund has been returning an annual return each year that is 0.25 percent higher than the funds paying a bonus; or their fees have been 0.25 percent lower - then you could be winning if you compound those returns or savings on fees in balanced or growth assets over the long term. So don’t forget to look further than the advertising. If you can get good long term growth, low fees AND a retirement bonus - then you’re really winning.
This week, my weekend newspaper column is a shorter article about retirement bonuses, limited simply by the reality that the newspaper can’t fit more than 1000 words in to it! You can read it in The Sydney Morning Herald, The Age, The Brisbane Times and WA Today here. I decided to feature a much longer version on this newsletter so you didn’t miss out on the good information I found in my research.
Have a read of the column here in The Age and The Sydney Morning Herald.
Our Winter Edition has just over one more week left. It’s gone by so fast. Gosh I love hosting it.
So this week I kick off the marketing of our next six week course - The How to Have an Epic Retirement Flagship Course - Spring Edition. It starts on the 8th August 2024. I can’t wait for the next six week program to begin. I have boxes and boxes of books and workbooks waiting to be signed and sent to our next cohort. Will you be in it?
Our earlybird pricing is now available at 25% off, but not for long. If you’re curious, you can download a brochure on the website here and read all about it. And, you can book your place so I can get your books and workbooks out as early as possible.
By stealth
We’re creeping up the Amazon bestseller list, almost by stealth. This week we’re at #27 on the overall Amazon Bestseller list - the highest I can remember seeing it at ever! Only nineteen days until my little book turns 1 year old! Thanks for spreading the word. If you haven’t already, you can order it on Amazon here.
Another fun statistic this week. The book popped up on a list as the ten most borrowed non-fiction library books in Wagga Wagga City Council Libraries. Cool huh! I am told some people buy the book because the library list is 50+ people deep. Should be worth it I think!
I spoke virtually for a professional development session to room full of financial advisers in Newcastle, about how to make retirements more epic - thanks to the team at Allianz Retire+ for inviting me to be part of their event.
I also made great headway on the writing of my next book, called ‘Prime Time’. It’s coming out in 2025 so watch this space.
On the Prime Time podcast, I interviewed the economist I have most looked up to over my investing lifetime, Shane Oliver, the Chief Economist for AMP. We looked into his very-well-respected crystal ball at what 2024/25 holds for pre- and post retirees that are dependent on markets for their passive income sources. He had some interesting views of which geopolitical issues to watch for, and which ones matter less. And, he’s calling Australian equities positively for the year ahead with some interesting insights into where the winners and losers will be.
Finally, The Epic Retirement Club is giving me excitement chills. I feel like the people in there know more about how to have an Epic Retirement than I had ever dreamed possible. And they’re guiding and supporting each other. If you havent joined yet - don’t delay. And, if you have, invite your friends. It certainly seems like the more the merrier. Visit it here.
On top of all those wonderful work things, I had a houseful of school holiday extended family visitors keeping my kitchen busy. And, I hosted several gatherings for my husbands birthday as his week-long celebration rolled through. So, I’m feeling like my cup is full.
Now off you go and make your Sunday epic. Until next week…
Many thanks! Bec Wilson
Author, podcaster, guest speaker, retirement educator … Visit my website for more info about me, here.
The outlook for investments, interest rates and inflation in the year ahead with Shane Oliver
We look into Shane Oliver's crystal ball for the year ahead.
When a new financial year ticks around, you find that the super funds start to crow (or cry) about their annual returns. And really, what we all want to know is, ‘what is next year going to be like?’ This week on Prime Time, we delve into that pressing question. We’ve brought in Shane Oliver, the Head of Investment Strategy at AMP Financial Services and their Chief Economist, one of Australia’s most well-known and well-respected economists, to help us navigate the financial landscape.
We explore the surprising positives from the past financial year and the key areas to watch. Shane offered insights on Australian equities, inflation, and interest rates, guiding you on how to protect your savings and investments. We also dive into the impacts of geopolitics, the evolving housing market, and his view on the best asset classes for balancing income and growth in the year ahead.
Whether you're living your Prime Time, approaching retirement or already there, understanding these trends is crucial. Shane’s predictions for the next year will help you make informed decisions to maximise your financial health.
LISTEN TO THIS EPISODE OF THE PODCAST HERE: