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03 Nov 2017 3 November 2017

Spend your super, get the pension! (corrected version)

Australians of retirement age who have a tidy but not exorbitant retirement fund face a real dilemma - how do they deal with stricter pension rules coupled with low returns on cash investments.

Prior to retirement any money held in a superannuation fund is not counted towards determining access to the age pension.

However, the minute the person goes into retirement, superannuation counts and can have serious negative consequences.

Let’s take the case of Ms Frugal, a single retired 65-year old who has a superannuation balance of $700,000 and a paid off home in which she lives.

Being fully retired and above the age of 65 means that Ms Frugal has unlimited access to her superannuation assets.

As Ms Frugal’s assets (including superannuation but excluding the home) exceed $552,000, she will not be entitled to a pension. On current interest rates a 3% pa return (ie $21,000 pa) is likely if invested safely in cash. This produces income of approximately $21,000. 

By comparison, Mr Spendalot upon hitting retirement with $700,000 in super spends $500,000 on a holiday and renovating his home. As total assets are now below $253,750 he is entitled to a full pension of $888.30 per fortnight. That gives rise to a total income of $23,095.80 pa (the age pension) plus $6,000 pa (investment income). 

Thus, Ms Frugal who diligently saved and kept $700,000 has available $21,000 pa and Mr Spendalot who spent a large part of his retirement nest egg and is left with only $200,000 has $29,095.80 pa.

Let’s now take the case of a couple, Mr and Mrs Stingy, who have super of $1million earning $30,000 pa. 

Again assume that they own their own home. As the combined assets of the couple exceed $830,000 they get no pension. 

The total full age pension for a home owner couple is $1,339.20 pf. The reduction caused by the “excessive” superannuation assets, means that the Stingys get no pension.

Now Mr and Mrs Liveitup, a home owning retired couple had super of $1m but upon retirement also splurged on a luxury holiday and renovations such that their super is now deleted to $540,000. With that lower amount they are now entitled to a part pension of $982.20 pf (ie $1,339.20 less $357)

This leads to some completely outrageous outcomes along the following lines: 

  • The Stingys with $1million in assets get a total income of $29,978 pa (ie $1,153 pf investment income); and 
  • The Liveitups with $500,000 in assets get total income of $40,019.20 pa (ie part age pension of $982.20 pf plus $557 pf investment income). 

How can these outcomes be justified as being fair? All it does is encourage people to flippantly and rapidly divest themselves of their retirement nest egg and rely on the age pension. 

It seems that couples with assets valued anywhere between about $600,000 and $1.3million are at risk of being better off with less super. 

That conclusion is utterly unacceptable. We seem to be saying to retirees, either be rich or be poor (of course rich is better) but whatever you do don’t be in the middle. Is it really sensible to encourage the exploitation of the system by having moderately wealthy pensioners live it up immediately after they reach retirement, dissipate their funds and end up relying on the state sponsored pension? 

Part of the problem is low interest rates. This may force some to seek higher returns and thereby take greater risks with retirement funds - not an outcome to be encouraged by government policy! Perhaps higher interest rates in days ahead will help to alleviate this problem. 

Part of the difficulty has been created by a doubling in the taper rate – that is the rate at which the pension decreases as the amount of assets increases above $380,500 for a home owning couple. That taper rate was doubled from $1.50 to $3 per $1,000 above the threshold from 1 January 2017. The doubling of the taper rate has significantly exacerbated this problem. 

The threshholds and the taper rate need to be reworked so as to ensure that our system does not encourage retirees to flippantly dissipate their superannuation savings in order to gain access to what, on current rates of interest at least, look like generous pension entitlements.

We welcome your thoughts via the Vine Feedback inbox.

Kind regards,

Bob Deutsch, CTA