How does super and the Age Pension affect your retirement income?
It may seem surprising that almost 25 years since it was introduced there would still be debate surrounding the purpose of superannuation. However, it is only following a recommendation from the Financial Services Inquiry in March of last year that the definitive objective of superannuation – “provide income in retirement to substitute or supplement the Age Pension” – is being enshrined in law.
How is Age Pension eligibility assessed?
Eligibility for the Age Pension is defined by several factors, including age and residential status. However, possibly the most important factors are the income and asset tests that are applied. When you apply for the Age Pension, Centrelink assesses your claim by applying both the income and asset tests. You will then be paid under the assessment method that results in the lower payment. For example, if your payment would be $540 per fortnight under the asset test but $536 under the income test, then you will be paid in accordance with the rules that apply to the income test.
So, where does super fit into the calculation?
Once you have reached Age Pension eligibility age, your superannuation is assessed under the income and the asset tests. The balance of your superannuation fund, or the amount used to purchase an income stream is assessed as a financial asset and deemed to earn income.
If you have a spouse, their super is assessed under the income and asset tests only once they have reached Age Pension eligibility age or commence the pension phase – where the super fund pays an income stream or pension.
If you have held your account-based pension and qualified for the Age Pension prior to?1 January 2015, then it will not be subject to deeming.
Also, defined benefit income streams are treated slightly different to the standard income streams. For this type of income stream there is a deductible amount, capped at a maximum of 10 per cent, taken from the gross payment. This remaining amount is then assessed under the income test
In order to maximise your income in retirement, it’s important to structure your finances in such a way that you are able to claim at least a part Age Pension. Not only will receiving a part Age Pension mean your super savings last longer, it will also give you access to a Pensioner Concession Card (PCC). Holders of a PCC can access concessions on prescription medicines, rates, car registration, utilities and much more.
By using Moneysmart’s Retirement Calculator you can estimate how much income you will receive from your super and the Age Pension once you retire. And if your calculation indicates that you won't receive an Age Pension, it’s worth bearing in mind that you may qualify for a Commonwealth Seniors Health Card – so it’s still worth making a claim with Centrelink.
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