Excess Super and Tax:  Lifetime Annuities are a Valuable Part of an Adviser’s Toolkit

On 13 October 2025, the Government confirmed its intention to introduce additional taxes on superannuation balances above $3 million ^[1] .

Previously referred to as the Division 296 proposals, the latest proposals are referred to as the Better Targeted Superannuation Concessions (BTSC) measure. The detail has been aligned more closely with existing tax concepts and a second threshold has been added – imposing an even higher tax on balances currently exceeding $10 million. These announcements make it clear the Government is determined to proceed with this reform for the 2026/27 tax year onward.

Australians with superannuation balances above $3 million are again asking: what does this mean for me — and what can I do about it?

In this article, we touch on how the proposed rules work based on the example in the revised factsheet ^[2] . We then consider what alternative options exist for those affected by the changes.

It is important to note that everyone’s circumstances are different e.g. regarding amounts, ages, tax rates and investment returns etc. – and each person should carry out their own calculations. This article is not providing  advice – just outlining examples for illustration.

A surprisingly under-discussed option for what is now considered ‘excess super’ is to make use of Australia’s new ‘non-super’ lifetime income products. In Part 2 of this article series, we’ll show a worked example for a retiree with $5 million of super – which could reduce the tax bill on his excess super in the first year by 87% compared to leaving it where it is – however this saving will reduce in future years as the taxable income from a non-superannuation lifetime annuity/pension product works very differently to other investments – as explained below.

How the BSTC tax will work 

Currently, earnings on pension accounts within the superannuation environment are generally tax-free, subject to the Transfer Balance Cap when the account is first commenced. Earnings on superannuation in accumulation accounts (less deductions and franking credits) get taxed at 15%.

The proposed BTSC tax will mean an additional 15% tax is payable on superannuation earnings attributed to the proportion of a person’s balance over $3 million, plus a further 10 % tax is payable on earnings attributable to the balance in excess of $10 million.  

The examples provided in the factsheet^[1] are for a person with $4.5 million in super and a person with $12.9 million in super on 30 June 2027.

The first worked example is as follows: 

1. The Total Super Balance (TSB) from her two superannuation funds comes to $4.5 million at the end of the 2025-27 tax year
2. She had a total of $300,000 realised earnings calculated by her funds (adjusted for elements such as contributions and pension phase income using methods closely aligned with existing tax concepts)
3. The portion of her $4.5 million balance above the $3 million threshold is 33.33%. 
4. Her BTSC tax liability is therefore $15,000 (15% x 33.33% x $300,000)

The second worked example is:

1. A TSB of $12.9 million and $840,000 realised earnings at the end of the 2026-27 tax year
2. The proportion of her balance above the $3 million threshold is 76.74% and the proportion above $10 million is 22.48%
3. Her BTSC tax liability is therefore $115,581 calculated as follows:
   • 15% x 76.74% x $840,000; plus a further
   • 10% x 22.48% x $840,000

It is a personal tax obligation, payable by the individual, but the person can elect to pay it from their superannuation balance.

Other options: Where could a person’s excess super move to?

Retirees know that once they leave the workforce, their savings have to fund some or all of their spending throughout retirement, supplementing whatever Age Pension they may receive.

But superannuation is not the only option for retirement savings. Other options include withdrawing the excess and using one or more of the following instead:

1. Invest outside of super: If retirement savings are moved outside the superannuation system then the investment earnings on that money, such as bank interest, dividends, rental income and capital gains, are taxable at the individual’s marginal tax rate.
   
   Many retirees find that their marginal tax rate falls significantly once they stop receiving a salary. This means their investment earnings on savings may be taxed lightly, as they use the lower tax brackets first before moving into higher rate bands. 
   
   Currently, taxable income up to $18,200 attracts no tax, income up to $45,000 is taxed at 16%, then 30% applies up to $135,000, 37% up to $190,000 and 45% beyond that. The 2% Medicare Levy is paid in addition. Retirees aged 67 or more may also benefit from the Senior and Pensioners Tax Offset (SAPTO) if their income is below the income test ^[3] .
   
   If bank interest rates were 5% p.a., a retiree would need around $900,000 on deposit before the interest pushed them into the 30% tax bracket, and about $2.7 million before reaching the 37% bracket. 
2. Invest in insurance bonds: An insurance bond (also known as an investment bond or life insurance bond) is an investment held within a life insurance structure. Some insurance bonds offer a large range of investment options. The life insurer pays tax at a flat rate of 30% on the investment earnings within the fund, although franking credits on dividends and other tax optimisation strategies can reduce the effective rate well below 30%. Explanatory materials that we have seen from providers of these bonds indicate that tax rates as low as 15% or even less are possible for long-term growth-oriented investment options.
   
   This tax on insurance bonds is a life insurance fund tax – meaning individual investors do not need to declare earnings or pay further tax, provided they meet certain conditions. If the bond is held for 10 years or more, or the investor dies, withdrawals are tax-free.
3. Invest in non-super lifetime income products or annuities: Lifetime income products offer an efficient way to provision for some of a retiree’s spending for life. It’s like having a salary but not having to work. The amount invested gets converted into lifetime income payments that get paid each year for the rest of the person’s life. The initial level of payments will depend on your life expectancy and the product’s design rules. There are many product options available, and several providers now offer a large range of investment options to choose from.
   
   There is no tax on the investments supporting these annuities. However, with non-super lifetime annuities, each annuity payment made consists of:

• A tax-free deductible amount each year (this equals the purchase price divided by the annuitant’s life expectancy from the Australian Life Tables when they purchased the annuity). It represents a return of capital over time.
• The remainder – which gets included in the annuitant’s taxable income i.e. taxed at the individual’s marginal rate.  Note that, as above, retirees have the lower tax bands available before paying more than 30% tax on this. For lifetime annuity products where payments increase over time, this taxable amount will increase as the Deductible Amount does not change from year to year.

In the next article, we’ll show a worked example for a retiree with $5 million of superannuation today.  In doing so, it’s also vital to consider the long-term impacts too.  Each option will generate investment income, less tax and the value of each option will reduce based on money that is withdrawn and spent.

The calculations can be substantially different for people on different marginal tax rates to each other. For example, due to other non-super income sources.

Final thoughts

Labor’s proposed BTSC tax creates a new layer of tax for higher-balance clients holding money in superannuation. While super remains a tax-effective structure for most retirees, those with balances above $3 million have good reason to explore alternatives.

Moving some excess funds into options such as non-super investments, insurance bonds, or non-super lifetime income products has the potential to deliver meaningful tax savings, but requires quality projections to be considered.

What’s right for each client depends on what tax band they are in, which depends on their total taxable income outside of super. Clients and their advisers should also consider non-tax objectives, such as estate planning. Insurance products — including bonds and non-super annuities — often have powerful estate planning features. 

References

^[1] Treasury. (n.d.). Reforms to support low income workers build a stronger super system. Australian Government. https://treasury.gov.au/policy-topics/superannuation/reforms-support-low-income-workers-build-stronger-super-system

^[2] Treasury. (n.d.). Reforms to support low income workers build a stronger super system. Australian Government. https://treasury.gov.au/policy-topics/superannuation/reforms-support-low-income-workers-build-stronger-super-system

^[3] Australian Taxation Office. (n.d.). Seniors and pensioners tax offset. https://www.ato.gov.au/individuals-and-families/income-deductions-offsets-and-records/tax-offsets/seniors-and-pensioners-tax-offset