This article was first published in The Australian on 4 October 2016
By Tony Negline
What is the optimum savings you should aim for to maximise income in retirement? The new super laws and age pension tests discourage saving, especially for those earning average weekly wages. In this article I’ll show why using some examples
We will assume you’re in a relationship, you’re both aged at least 65 and own your home without debt. Our main area of focus will be your super assets, which is your major investment. In all our case studies we will assume you want a super pension from a non public sector super fund which will pay you 5% income. All income paid to you is tax free.
For the sake of simplicity, we will assume this super pension started after December 2014, meaning the account balance is deemed under Centrelink’s income test.
Apart from your home and your super, you own $50,000 worth of personal use assets including your car. You have no other assets.
The case studies below consider the assets test thresholds which will apply from 1 January 2017.
Case study 1 – you have $1.6 million in super assets
In this particular case you will receive no age pension and therefore your income is $80,000 per annum.
Case study 2 – $200,000 in super assets
Your super pension will pay you $10,000 and you will be eligible for the full age pension of $34,382, including the pension and energy supplements. Total income is therefore $44,382.
Case study 3 – $500,000 in super assets
You will receive total income of $45,732 – a part age pension of $20,732 and $25,000 from their super pension.
Case study 4 – what about $700,000 of super assets?
You will receive a super pension of $35,000 and a part age pension of $5,132 which means income is $40,132.
Case study 5 – $1 million in super assets
You would receive no age pension and need to live off your super pension of $50,000.
What does this mean? You can have fewer assets but more income each year.
The sweet spot seems to be about $339,143 in super assets. At this level, your total income will be $50,236.
Let’s compare the income a couple with $500,000 in super assets of $45,732, with the $80,000 income a couple will receive if they have $1.6 million in super. Those with the higher balance have more than three times the assets but only receive 75% more income.
The government says it is changing the super system to make it fairer and more equitable. These are the reasons for the $1.6 million pension cap, the $250,000 income threshold for higher contributions tax, the lower contribution caps and the refund of contributions tax for lower income earners. Based on all our cases above, do these arguments really hold?
For those earning anywhere between 80% and about 180% of average wages – that is, between $65,000 and $150,000 – it takes a lot of effort and sacrifice over many years to save a meaningful amount of money towards retirement.
After looking at our case studies, why would they bother saving anything more than compulsory super and living in the best home they can afford that is very well maintained?
Anyone earning $50,000 each year – which increases at 2% annually and their super grows by 5% after all taxes, fees and charges and receives compulsory super – will have $400,000 in super assets after 31 years of work. At that point if they were to retire, they would receive 100% of their pre retirement income. Clearly there is a distinct disincentive for people in this situation to work for longer or to try and earn a higher salary.
The government wouldn’t be keen but maybe we need to go back to the drawing board. New Zealand has a universal age pension, called NZ Super, which is set at about 65% of average wages and is subject to income tax. It is paid from age 65 regardless of the income you earn or the assets you own – so there is no disincentive to stop work. In addition, such a system would remove the cost of running our age pension income and asset test bureaucracy and eliminate the expenses retirees incur each year to maximise their age pension entitlements.
Tony Negline is author of The Essential SMSF Guide 2016/17 published by Thomson Reuters.