Middle Australia’s mean pension test

A quarter of Australians approaching retirement face spending their savings or losing access to disposable income from the Age Pension, putting them at increased risk of running out of money.

That’s the view of Spending in Retirement, a paper written by Andrew Boal, chief executive of actuarial firm Rice Warner, for the Actuaries Institute. It argues that the means test applied to retirement savings encourages older Australians to spend their nest egg before they retire.

Though most Australians have so far proven to be cautious in their spending, the paper says complexity around the means test also makes it difficult for retirees to plan for the future without professional guidance.

“Without assistance, it is impossible for the layperson to know how much to withdraw and when deferred lifetime annuities (DLAs) might be a suitable product given their circumstances,” he said. “We need to find a way to deliver appropriate advice cost effectively to help the growing number of people entering retirement with sufficient superannuation savings to encounter these problems.”

Mr Boal identifies a ‘middle group’, likely to be eligible for a part Age Pension for much of their retirement, as most needing guidance.

These Australians have $300,000 to $800,000 in retirement savings. This group, according to Investor Daily, “covers around 25 per cent of retirees currently, but it is expected to grow to more than half of the population”.

“If a retiree has less than $300,000, they will be entitled to a full Age Pension for most, if not all, of their retirement as their main source of income,” says Investor Daily. “Meanwhile retirees at the other end, with more than $800,000 and home ownership, will be less likely to be eligible for any Age Pension.”

A mid-income retiree could lose as much as $40,000, according to the Spending in Retirement report, which adds that the more they save, the worse off they are.

The taper rate acts to restrict a retiree’s access to Age Pension payments based on the level of their assets through retirement.

Prior to 2017, the taper rate was set at $39. But from 1 January 2017, a retiree’s annual pension was cut by $78 for every $1000 of assets held above the relevant thresholds.

This ‘taper trap’ “encourages some retirees to spend their savings quickly, and risk living on the Age Pension alone”, the Actuaries Institute claims.

If a retiree has less than $300,000, they will be entitled to a full Age Pension for most, if not all, of their retirement as their main source of income.

“While the system needs to be affordable and fair, it also needs to help Australians spend their money in retirement.”

Mr Boal urges an “equitable taper rate that does not unduly encourage retirees to spend their savings too quickly”.

“The wealthy end will be okay: they can afford to get their own advice and have enough money to get by reasonably well,” he said.

The lower-income people generally use their smaller account balances to subsidise the Age Pension. But the middle group is really in need of advice and new retirement products, to give them the confidence to spend their savings, so they can afford to live as good a lifestyle in retirement as possible.

If, according to Mr Boal, one of the objectives of the superannuation system is to “facilitate consumption smoothing over the course of an individual’s life”, and during retirement, then this ‘middle’ group would benefit from:

  • encouragement to acquire longevity protection to give them more confidence to spend their savings during retirement
  • a fairer taper rate that does not unduly encourage them to spend their retirement savings too quickly
  • low-cost access to information, guidance, and advice to help them make better decisions about their retirement.


The report says that longevity is one of the major risks faced by retirees and that the system should provide retirees with the confidence to safely spend more – “enjoying a better lifestyle, particularly during the early and more active years of retirement”.

The federal government’s Retirement Income Review is set to be handed down on 24 July.

Are you confident the taper rate will be part of the government’s review?

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Written by Will Brodie

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