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.
YourLifeChoices asked three financial planners to assist with three case studies, helping each to make their super go further. Duncan Collie took on the theoretical case of Cash-Strapped Single Paula*, who struggles from week to week to pay essential bills.
Case study 3 – Cash-Strapped Single
Paula is 67.
She rents in Adelaide.
She receives a full Age Pension ($907.60 per fortnight, including supplements).
She works as a cleaner and is paid $172 per fortnight.
$22,000 in shares
$78,000 in super
$10,000 of assets (not deemable)
|Full Age Pension (and supplements)||$23,823||$23,823|
Paula is a member of the Cash-Strapped tribe – retirees who rent and receive an Age Pension. YourLifeChoicesestimates in its quarterly Retirement Affordability Index™ that her total annual expenditure is $22,743.
At 67, Paula would expect to have many years of retirement ahead of her. Life expectancy has increased considerably and retirees need to plan their finances with a longer timeframe in mind.
Paula could consider selling her $22,000 of shares and contributing the funds into her super, although there may be tax consequences. To do this, she needs to have met the work test, that is, to have worked at least 40 hours within 30 consecutive days during the same financial year that the contribution is made. She must also be between 65 and 75 years. She will be limited to an after-tax contribution to super of $100,000 per year.
Paula could roll the funds in her super into an account-based pension. This account could pay her a regular income to top up her Age Pension and work income. Due to her life expectancy, it is important that she is able to receive some capital growth in this pension account to make it go further.
And she must be aware that she needs to withdraw a minimum of five per cent of the balance of her account-based pension per annum.
She could consider withdrawing all her funds from super as a lump sum instead of starting an account-based pension. However, she would then have to invest those funds outside of super, which might not be as tax-effective. If she left the funds in a bank account, they would earn low interest and potentially lose real value over time due to the effects of inflation.
As Paula draws down her income from her pension, and considering the effects of inflation, the fund could run out long before she would like it to. Capital growth would go some way to stretching the life of the fund.
To increase her chances of receiving capital growth, Paula could include some growth assets in her super investment strategy. Growth assets generally include shares, property and infrastructure. The proportion of her funds that should be invested in growth assets will depend on her risk profile and how much volatility she is willing to accept.
She can change the amount she draws down from her account-based pension at any time as long as she withdraws the minimum five per cent per annum. She can also access lump sums whenever she wants, giving her control and flexibility over her income. She could use online calculators to assist her in determining how long her account-based pension might last based on how much she wishes to draw down.
Paula will continue to receive the full Age Pension of $916.30 per fortnight as she is below the minimum asset and income thresholds that determine her benefit amount. Although she expects to earn $172 per fortnight through her work as a cleaner, under the Work Bonus scheme this income will not be assessed by Centrelink under the pension income test. In fact, Paula could earn up to $250 per fortnight without affecting her Age Pension.
She should apply for Rent Assistance through the Department of Human Services. As a single renter receiving an Age Pension, she could receive up to $134.80 per fortnight on top of her Age Pension payments.
With her Age Pension, rent assistance, extra employment income and the funds she will draw from her account-based pension after selling her shares and putting that money into super, Paula can boost her annual income.
Furthermore, the money paid from her account-based pension is considered non-assessable income for tax purposes, and with the seniors’ and pensioners’ tax offset as well as the low and middle-income tax offsets, she will not pay any tax on her total income.
But she should nominate a beneficiary for her super to ensure that her fund knows who she wants her super to go to in the event of her death.
Super does not automatically become part of someone’s estate on their death and is generally paid directly to a beneficiary. Only certain people can be nominated as beneficiaries for super: a spouse (including de facto and same sex), children of any age, a person in an interdependent relationship with the deceased, and personal legal representative (the executor or administrator of your estate). Paula can make a binding or non-binding nomination. A binding death benefit nomination will provide the most certainty.
She could also consider undertaking a re-contribution strategy by withdrawing all her super as a lump sum and re-contributing these funds back into super. If her superannuation contains a taxable component, this strategy can help reduce the potential tax payable if her super is passed on to her beneficiaries in the event of her death.
Duncan Collie is a financial planner with AustralianSuper.
* Paula is not a real person.