Tax on large withdrawals floated to future-proof super

Retirees might be more inclined to use super for its intended purpose - income for retirement - under a proposal to tax oversized withdrawals.

Four actuaries have waded into the ever-contentious tax debate with a discussion paper thrashing out opportunities to make the super system simpler and more equitable.

In the paper commissioned by the Actuaries Institute to spark conversation, Richard Dunn and his three co-authors floated a tax on very high withdrawals in retirement, as well as simplified tax rules for bequests.

“The changes to benefits we’re proposing really aim to go to the heart of how do we encourage Australians to use their retirement monies for the purposes of delivering an income in retirement, rather than other purposes, bequests or taking out large lump sums,” Mr Dunn told AAP.

At the moment, all retirement benefits are tax-free.

Taxing retirees on large withdrawals would encourage people to take out sustainable amounts of income throughout the retirement rather than using super for accumulating tax-free bequests, he said.

The authors suggested high thresholds for incurring tax of, say, $250,000 for a lump sum, or $150,000 a year as pension benefits.

Anything below those limits would be tax-free under the plan from Mr Dunn and his fellow actuary co-authors Michael Rice, Jennifer Shaw and Alun Stevens.

“The experience of most consumers will be completely the same,” Mr Dunn explained.

“This is really targeted towards dealing with extremely high balances being pulled out.”

The authors further envisioned carve-outs for early phases of retirement to pay down mortgages or travel, as well as for healthcare.

While Australia’s retirement system is ranked highly internationally, the top countries typically have some level of encouragement to take income out throughout retirement, according to the paper.

The federal government in November legislated an objective for superannuation for the first time.

Mr Dunn said the recommendations for withdrawals aligned neatly with the government’s state objective to ‘‘preserve savings to deliver income for a dignified retirement”.

Monday’s discussion paper also suggests applying a uniform tax of about 10 per cent on earnings across accumulation and retirement phases, allowing people to have just one account.

At present, earnings in the accumulation phase are taxed at 15 per cent and not at all in retirement, meaning two super accounts are needed.

Mr Dunn said it was important to start making sure the settings were right for the $4.1 trillion superannuation system.

“We have a superannuation system that’s working, but it’s one of the most complex in the world,” he said.

“Our proposals make super simpler for consumers and funds, while improving equity across the system.”

The reforms suggested in the paper do not reflect the official position of the Actuaries Institute but rather the paper’s authors.