There was a time when newly minted retirees could expect a gold watch and a farewell lunch from their employer. These days, your super fund could provide something far more valuable - a retirement bonus.

Retirement bonuses have to be one of the best-kept secrets of our super system. If you haven't heard about them, here's how they work.

Throughout the accumulation phase, when we're in the workforce, your fund invests your super savings across a variety of assets. Some will be sold for a profit and, quite sensibly, super funds put money aside in anticipation of the capital gains tax (CGT) they will need to pay on those realised profits.

When we retire and move our super from the accumulation phase into the pension phase - usually by investing in a retirement income stream - tax is no longer payable. That means the money your fund set aside to pay CGT isn't needed anymore.

Enter the retirement bonus. It's all about super funds handing back part of the cash originally set aside for tax dues when a member transitions into retirement. 

A retirement bonus can give your golden years a glowing head start. But don't bank on this kind of boost. Only around one in three super funds pay retirement bonuses.

Where they are available, bonuses are usually calculated in one of three ways:

1. A fixed percentage of the average account balance for a period before the transfer, most commonly 12 months.
2. A fixed percentage of the opening pension account balance (with various caps).
3. A unique percentage of the opening balance based on the member's investment and balance history.

There are other bonus structures too, such as administration fee waivers, though these are less common.

The main point is that the more super you transfer to a retirement income stream, the bigger the bonus you could receive. So, it is a way for funds to encourage members to stay loyal to the fund and keep the bulk of their nest egg inside the super system.

As a guide to the possible sums involved, Telstra Super pays a retirement bonus equal to 0.5% of the balance invested, up to a maximum of $8,000. You'll need at least $1.6 million invested in a retirement income stream to earn the top bonus.

Australian Retirement Trust also pays a 0.5% bonus though up to a maximum of $9,500. Brighter Super pays what it calls a 'retirement reward' of up to $9,500. MLC currently has one of the more generous bonuses based on 1.2% of the account balance though this has fluctuated a fair bit over the past two years.

As a retirement bonus is not a contribution, the money doesn't count towards the annual contribution caps. Nor is it taxed. However, it can count towards the transfer balance cap of $1.9 million. This is the total amount of super that can be transferred into the retirement phase.  

With retirement bonuses only paid by around one-third of super funds, it can be tempting to switch funds purely to give your nest egg a last-minute lift.

But financial institutions rarely offer a free lunch and, not surprisingly, eligibility conditions often apply to receive a retirement bonus. With Rest Super, for instance, you need to have been a member for at least 12 months to be eligible.

More importantly, consider whether a one-off bonus is worth switching funds for.

The maximum bonuses I've listed here only apply to very high account balances. Most Australians have far less in super.

The latest Tax Office data (from 2021) shows the median balance for men aged 65-69 is $213,986. The median for women of that age is $201,233.

On these balances, a retirement bonus of 0.5% is likely to be around $1,000. Sure, it's a bit of extra money for your nest egg but is it a game changer? Possibly not.

Many Australians can expect to enjoy a retirement spanning 20 years or more. Over that sort of timeframe, you may be better off sticking with a fund that has a track record of consistently strong returns coupled with low fees, rather than chasing what may be a modest one-off cash boost.

Broadly speaking, there are several issues to be aware of.

●     With some super funds the bonus you receive can vary from month to month. So how much you get can vary in line with when you retire.

●     Some bonuses are reduced to zero if you switch to certain investment options such as cash or bonds.

●     The bonus may not be paid immediately. You could be paid months after you invest in a retirement income stream, or even in the following financial year.

●     Waiting periods and a clawback rule can apply to deter members from leaving a fund shortly after investing in a retirement income stream.   

●     You only get one bite of this cherry. Retirement bonuses are typically only paid once. Moving your money between different pension products as you traverse retirement is unlikely to produce multiple bonuses.

The bottom line is to check if your fund pays a retirement bonus. If it does, great. If not, it may only be a matter of time before they are introduced. Back in 2017, just three super funds offered retirement bonuses. That number has increased rapidly, and as super funds compete for workers' retirement savings it's a fair bet these bonuses will become the norm rather than the exception.