Super funds pay thousands in tax-free bonuses to retain retiring members

Super funds are increasingly paying out retirement bonuses to senior Australians when they switch their nest eggs to the pension phase, but savers risk missing out on thousands of dollars because they don’t understand the rules.

Retirement bonuses, which are effectively a refund of superannuation taxes no longer payable when members move to a tax-free pension, can be complex and confusing, and not every super fund offers them.

The retirement bonuses, also called pension bonuses, began appearing a decade ago and super funds have different ways of calculating the payments, most commonly using a percentage of a person’s total balance.

Goldsborough Financial Services director Brenton Miegel said he had seen a spike in retirement bonuses being offered in the past six months, with Colonial First State recently joining the ranks of the payers in August and offering a flat 0.8 per cent of a member’s balance.

“Some industry funds have been doing it for a while, and some of the retail funds are now starting to catch up,” Mr Miegel said.

“It’s just a way of refunding the tax credits,” he said.

But some financial advisers have criticised them as a cynical way for super funds to hold onto members’ money when their balances are the biggest, preventing them from moving to another fund that may be a better option in retirement.

The bonuses top tens of thousands of dollars for some high-balance members, but advisers say there are more important factors that should influence whether you stick with your existing fund for retirement, including fees and performance.

Expectations of a bonus should not be the primary reason for sticking with your current super fund, Mr Miegel said. “You’ve still got to consider fees, the administration quality, estate planning benefits, taxation issues, and performance definitely comes into it,” he said.

MLC started paying retirement bonuses in 2022, and chief customer officer Renee Howie said it had since handed over almost $31m to more than 6500 members.

“This includes $13.75m in the last 12 months, and in that time the average bonus has been $6759,” she said.

“We’d like to see all funds paying out pension bonuses.”

Ms Howie said the bonus size was impacted by the payment rate offered and the member’s balance, and based on MLC’s 1.25 per cent payment rate a member retiring with a balance of $500,000 would receive a bonus of $6250. Its biggest bonus paid so far to a single member was $26,500.

“For members nearing retirement they could consider strategies such as salary sacrifice and extra super contributions, and maximising the available contributions caps, to help boost their balance and therefore their retirement bonus,” Ms Howie said.

Most bonus-paying funds require members to have been with them for at least a year, so switching just before retirement can potentially be costly.

Some funds do not pay a flat percentage rate but instead base it on variable factors.

AustralianSuper and Cbus Super are among these, and Cbus chief executive officer Kristian Fok said its payouts were based on a member’s balance and their investment option.

High-growth investment options, containing growth assets such as shares and property that have capital gains, deliver the biggest payouts because those gains are no longer taxable in the pension phase. Cbus’s average payout this year has been $4500.

“It’s the principle of unrealised capital gains – if you move it into the pension option … you’re not taxed on it,” Mr Fok said.

Under the Cbus model, super savers who change to more conservative investment options before switching to an account based pension can suffer a shrunken bonus.

“If you’re in cash there’s no unrealised capital gains because it’s all income,” Mr Fok said.

He said super funds needed to do a better job explaining the bonus to their members and helping them understand how it worked.

“If we didn’t pass it on it would just go into the pool for members.

“Reach out to your own fund as a first port of call. There’s a lot of tools and things in your fund that you probably didn’t know you had.”

This article first appeared in The Australian as Super funds pay thousands in tax-free bonuses to retain retiring members

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