Superannuation is the key to decreasing reliance on the Age Pension. The Superannuation Guarantee, introduced in 1992, means most older Australians who are either retired or closing in on retirement have super. Obviously, the length of employment and salary affects the size of the nest egg, but no matter how big or small, maximising the value of your super is paramount.
That’s why we presented three financial planners with three case studies – one for each of our retirement tribes. Their challenge was to make their case study’s super go further. Hopefully, their strategies can inform you.
Affluent tribe couple Jeff and Marion have a $420,000 super nest egg, but Emmett Wilkinson warns that without a retirement income strategy, the future looks challenging
Case study 1 – Affluent Couple
Jeff (68) and Marion (62) live in Perth.
They own a home valued at $1.2 million, with no mortgage.
They have an investment property worth $550,000 with a $50,000 mortgage.
They work part-time.
$420,000 in super (Jeff has $280,000 and Marion $140,000)
$50,000 in shares
|Super lump sum withdrawal||$50,000||$40,000|
|Income from shares||$1,500||$1,500|
|Age Pension (Jeff)||$0||$10,060|
* Emmett Wilkinson’s preferred strategy, which maintains income but saves on super
Semi-retired couple Marion and Jeff* are members of YourLifeChoices’ Affluent tribe. The Retirement Affordability Index™ estimates that they need an annual income of $74,813 to meet expenses. While they have a current annual income of well over that, they will run out of super well short of their life expectancy.
One possible strategy that could improve the couple’s overall financial situation, and thus make their super go further, would be a Superannuation Recontribution Strategy. This is where Jeff could withdraw his superannuation and contribute the proceeds to Marion’s superannuation account.
As Jeff is over 65, he is able to access his superannuation without restriction and any withdrawals will be tax-free. Marion is able to make non-concessional (after tax) contributions of up to $100,000 per year, and because of her age, can take advantage of what is termed the ‘bring-forward’ rule, which is bringing forward two additional years’ worth of contributions. This means that in one year, Marion would be able to contribute, after tax, $300,000. Marion can do this because she is under 65 and has not utilised the ‘bring-forward’ rule in the previous three years.
This strategy could enable Jeff to qualify for an Age Pension of approximately $387 per fortnight ($10,060 per annum) and he would also be eligible for a Pensioner Concession Card. If the couple were to do nothing, Jeff and Marion would exceed the assets test threshold ($848,000) for home-owner couples (assets include their cars, contents, bank account, net investment property value, Jeff’s super and shares, which adds up to $870,000 meaning no Age Pension).
As you can see, Marion’s super is not included in the total. Her super is exempt from the assets and income tests as she is below pension age (which is 66.5 years for Marion) and is not taking a retirement income stream (e.g. account-based pension) from her super account.
They could continue to supplement their income by withdrawing a smaller lump sum to maintain the same lifestyle and see their super last longer. While Jeff can withdraw funds from his super without restriction, Marion would need to be classed as retired to access her super.
As Marion is over 60, if she terminates her employment, she would trigger a condition of release – the technical term for being able to access her super. And again because she is over 60, no tax would be payable on withdrawals. Centrelink do not regard these withdrawals as income and if they are used to fund their expenses, then, in practice, there will be no asset test implications either.
Consideration could also be made to selling other assets prior to withdrawing funds from super. For example, if they were to sell a portion of their share portfolio, Jeff’s age pension entitlement would increase by approximately $1950 per year. This is because their assessable assets would have reduced.
Another consideration would be to sell the share portfolio to repay the debt on the investment property. As it is a relatively small mortgage, and considering their existing tax position, the mortgage isn’t providing any significant tax savings. Due to their age, Jeff and Marion would pay little to no personal income tax given their respective taxable incomes (remembering that withdrawals from super are not taxable).
Most couples in Jeff and Marion’s situation would have turned their superannuation accounts into retirement income streams. However, if they were to convert their super into retirement income streams Jeff would not be eligible for the Age Pension as the income stream would be treated as an asset and deemed for income testing purposes.
Using the superannuation recontribution strategy in this instance would result in additional age pension income of approximately $10,060 in year one (possibly $12,010 if shares were also sold) plus the concession card benefits. It is a clear winner.
The strategy could potentially provide the couple with up to $54,000 of extra income over the next four-and-a-half years until Marion turns 66.5 years, at which time their situation would need to be re-assessed. Looking for opportunities such as this is something a good financial planner should be able to help you with.
Beyond this short-term strategy to increase Jeff’s age pension entitlement, the couple do face some longer-term issues. They are chewing through their super at a rapid rate and when Marion turns 66.5, whatever super they have will again be counted as an asset and trigger a reduction in age pension payments.
They also face a common situation for retirees in their category in that one of their most substantial assets is the investment property, which, while generating a good rental return (5 per cent per annum) is illiquid (i.e. hard to convert to cash).
I won’t be the first or last person (unfortunately) to pull out the old chestnut, ‘you can’t just sell off the bathroom’, but investment properties can present a challenge for couples needing to draw down on their capital in retirement. They would need to put some consideration into when and if they sell their investment property to provide additional capital.
The rules relating to the assets and income testing of annuities for age pension purposes are changing from 1 July 2019, and Jeff and Marion could consider this as part of their retirement strategy in the future.
*Jeff and Marion are not a real couple.
Disclaimer: All content in the Retirement Affordability Index™ is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.
Emmett Wilkinson is a Certified Financial Planner who specialises in providing advice on aged care and retirement planning at Advisersure Pty Ltd in Melbourne. He has worked as a financial planner for 20 years and previously worked for the Australian Taxation Office and the Reserve Bank of Australia. Advisersure Pty Ltd and Emmett Wilkinson are Authorised Representatives (424041/319614) of MyPlanner Professional Services Pty Ltd AFSL 425542.