Finance Your Super Actuaries: don’t cut off your super nose to spite your pension face

Actuaries: don’t cut off your super nose to spite your pension face

Save retirement funds.
If you spend retirement funds early you may live to regret it. Photo: Getty
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New pension taper rules applying from January 1 next year have many retired people worried.

That’s understandable because the new system will see 200,000 pensioners suffer a reduction in their pensions and almost 100,000 lose the pension altogether.

That’s because the amount of money pensioners can hold outside the family home and still receive a part pension will be cut significantly.

Now a home owning couple can hold $1.17 million or a single home owner $791,750 in other assets and still receive a part pension. Under new rules those figures will be $823,000 and $547,000 respectively.

Some people are panicking and planning to spend up their asset base early to ensure they get a higher pension.

Some advisors are pushing that line but it appears that’s not a good plan. A new report from The Actuaries Institute Superannuation Projections and Disclosure (SPD) sub-committee finds that will leave retirees with much less to live on in their later years.

Don’t take things at face value

The report points out that after January 1 “the age pension reduces by $78 per year for each $1,000 of non-home assets over certain thresholds.  At first glance, this looks like you’d have to earn over 7.8 per cent on the extra $1,000 or you’d be better off without the extra $1,000 of assets.”

The Actuaries Institute says this logic ignores the fact that a partial age pension entitlement generally increases throughout retirement as retirees spend their assets. The Institute gives the following example to show what happens if you spend up too early.

It is based on two single females (Anne and Barbara) who own their own homes. Both have only an allocated pension from super outside their home.

They are assumed to require an annual income (the combination of the age pension and income from the allocated pension) equal to Association of Superannuation Funds of Australia’s comfortable lifestyle for a single person indexed to CPI. That stands t $43,063 for a single home owner currently.

Barbara Anne Ba Ba, Ba Barbara Anne

Both Barbara and Anne plan to retire at age 65 on 1 January 2017 with potentially identical superannuation assets of $450,000. Anne increases her spending before 1 July 2017 so as to reduce her retirement assets and receive a higher age pension than Barbara, who decides to save her money.

Anne spent up so big she reduced her final retirement benefit on 1 January 2017 to $250,000. Both have good genes and live to 100 and this is what their retirements look like.

Barbara and Anne's retirement incomes.
Barbara and Anne’s retirement incomes.

It can be seen Anne earns more from the pension in the early years because the pension assets she owns do not reduce her age pension.

The tortoise and the hare

However, Anne’s early profligacy means she exhausts her assets by age 84. Then she must live on the age pension or use her home to generate additional income.

Barbara, however, at age 84, still has pension assets and has a higher income for the rest of her life than Anne. Also Barbara’s total income is equal to or greater than her desired income level throughout retirement.

She will also maintain a balance in her allocated pension throughout retirement and can continue without resorting to using her own home to generate additional income. Her kids will be happy.


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