The Age Pension can potentially offset a one-third fall in a wealthy couple’s investment portfolio, according to analysis by global actuarial firm Milliman.
“The immense value of the Age Pension is often underappreciated when markets are strong, but its worth is never greater than in a crisis,” says Wade Matterson, Milliman’s practice leader of risk management practice.
Milliman has modelled thousands of scenarios for a 65-year-old couple that own their home and have $1 million in superannuation pension assets. Despite not initially being eligible for the Age Pension, it offers them “enormous additional value” in the future as they draw down on their income.
Their potential future Age Pension payments over the next 25 years could have a median value of around $180,000, the analysis shows, and if their assets fall in value, the value of their pension increases, covering the fall in their savings.
“In the current environment, for clients currently seeing their super balances shrinking, understanding the role of the Age Pension as part of their retirement plan can provide welcome reassurance,” says Milliman.
Mr Matterson says the Age Pension can provide immense value to even quite well-off retirees, but he warns future investments can vary, and the rules around pension eligibility could change, leading to access issues or less support.
Hence, it is vital that retirees seek ongoing expert advice.
The pandemic initially wreaked havoc on superannuation portfolios, with the AFR reporting in March: “Superannuation investors face losing between 10 and 15 per cent of their savings as $290 billion was wiped off the value of balances in the first weeks of the coronavirus downturn.”
The situation has stabilised somewhat, but AFR reporter Duncan Hughes says the rule of thumb that drawing down at a rate of 4 per cent from a pension pot, increasing each year in line with inflation, should be a sustainable approach in now outmoded.
Brendan Ryan, principal of independent financial adviser Later Life Advice, told Mr Hughes there is a new status quo in retirement savings and “retirees need to be aware of at least 40 entitlements and rebates subject to means testing and deeming rates”.
“According to the Association of Superannuation Funds of Australia (ASFA), the nation’s peak super body, a comfortable retirement for a couple costs about $62,000 a year. The maximum Age Pension for a couple is $37,000,” Mr Hughes writes. [In-depth analysis by YourLifeChoices and The Australia Institute shows a couple would need an annual budget of $76,390 for an ‘affluent’ lifestyle.]
“A homeowner couple with assessable assets of about $876,000 can get a part pension. They can get the full pension when assets drop below about $400,000. The age for pension eligibility is 66.”
In a separate article for Investment Magazine, Mr Matterson slammed the superannuation industry as complacent, saying the “constant, guaranteed flow of members’ money” had made them unwilling to consider short-term difficulties as well as long-term retirement income goals.
Instead of a “myopic focus on the long term”, he urged trustees of funds to develop a new set of skills, tools and technology to focus on risk and its effective management.
“Managing risk – be that controlling the spread of the coronavirus or protecting the retirement plans of members – requires trustees to ask questions, challenge assumptions and plan for every possible scenario no matter how seemingly unlikely.
“The challenge for the super industry is to accept that another one in 100-year crisis is already in the making and start preparing for the inevitable.
“In order to do so, they will need to know their members better, which requires systems and technology that can efficiently capture, record and analyse member data. They will also need a laser focus on meeting their members’ current and future needs, and adequately managing risks no matter what life may throw at them.”
Five ways the Retirement Income Review points to possible policy changes, according to Firstlinks editor Graham Hand
- 1. Increases in super result in lower wages growth
The government now has the ammunition to ditch the legislated increase in the Superannuation Guarantee from 9.5 per cent to 10 per cent on 1 July 2021, and subsequent increases to 12 per cent, claiming the money is better in workers’ hands now. Opponents argue that real wages have stagnated at a time when super has not increased.
- 2. Retirees must learn to spend their capital not only live on their income
The review makes many references to the capital in a superannuation fund financing retirement, not only the income. Superannuation should smooth income over work and retirement, not build a nest egg to leave to the next generation.
- 3. People with large super balances receive too much in tax concessions
While the Age Pension helps offset inequities in retirement outcomes, the design of superannuation tax concessions increases inequality in the system. Tax concessions provide greater benefit to people on higher incomes.
- 4. The family home is a vital part of retirement planning
Instead of the heavy focus on superannuation in retirement, the family home will increasingly come into play, including how super money can be used to buy a home.
- 5. The case to means test the family home
The report only hints at this controversial topic, but does address it, via ‘stakeholders’:
Some stakeholders suggested that if a retiree’s principal residence were part of the Age Pension assets test, this would help equate the treatment of homeowners and renters. If the home were included in the assets test, some homeowners would no longer be eligible for the Age Pension. Others would receive less Age Pension. In response, homeowners may be more inclined to access the equity in their home to fund their retirement.
Do you believe the days of the home being exempt from Age Pension eligibility are numbered? Have Age Pension payments kept pace with the cost of living?
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