Middle Australians are being left behind by a tax system forcing them to spend unnecessarily large parts of their savings to maximise their retirement incomes.
Asset taper rates currently used to assess the size of aged pensions paid to retirees are leaving many Australians high and dry, according to new research by the Actuaries Institute
“There is a cohort of people who have between $250,000 and $800,000 in retirement savings who the system encourages to spend their savings in retirement quickly and risk being left living on the age pension alone,” said Auctuaries Institute retirement strategy specialist and Rice Warner CEO Andrew Boal.
The problem was created in 2017 when the government increased the taper rate to $78 for every $1000 in assets held above pension assets test thresholds, up from the $39 level prior to that.
That means that pension entitlements for people who hit the relevant assets test threshold erode more quickly than they used to.
As a result many retirees are left with little choice but to reduce their savings by spending more than they want to or face being left on a lower retirement income than they previously would have been entitled to because their pension entitlement has slipped.
Encouragement to spend
“A higher taper rate does encourage retirees to spend their savings as quickly as possible until they become eligible for the full Age Pension,” Mr Boal said.
Recent research from Industry Super Australia puts a figure on the numbers likely to be affected.
“In the next decade more than 1 million Australians will be caught up in an unfair retiree tax that will mean they will end up with less spending money after saving more,” ISA’s research says.
This perverse pension test means their retirement income actually goes backwards with the more they save.
“For example, a couple who saved more than $875,000 for retirement has $12,000 a year less to spend than if they retired with $400,000.”
That example assumes that the couple withdraw the minimum amount from their super the law requires, and receive the maximum allowable pension.
Their only option to increase their income is to draw down their super by enough to make up the difference or take out a lump sum and spend it.
But, if nothing changes, by 2030 it will be 45 per cent.
Because many retirees are not comfortable withdrawing a lot of super and being left only on the age pension they as a result live frugal retirements that can verge on poverty, the Actuaries Institute found.
The result can be that retirees who salary sacrifice an extra 2.5 per cent on top of their legislated super guarantee contribution of 9.5 per cent of salary finish up not enjoying the full benefits of those savings during their lifetimes.
The same effect will result when the super guarantee goes up to 12 per cent for those working a lifetime at that rate.
The table below demonstrates that situation.
A retiree who has earned the average annual earnings of $90,000 while working and salary sacrificed 2.5 per cent will have accrued an extra $61,000 in earnings in their super fund over a working life.
However with the taper rate at the current high level, were that person to take only the minimum required super drawdown between the ages of 67 and 90 they would only use $21,000 of the $61,000 in extra earnings.
Were the taper rate to go back to its former $39 then all those extra earnings would have been used and a little extra.
Mr Boal said it was unlikely that the old rate would be introduced but a mid range rate of $58.50 would result in the retiree spending $43,000 of their extra savings – a more attractive result.
“I think a reasonable taper rate would be between $52 and $58.50,” he said.
Changing the taper rate would be only half the solution.
“We need to find a way to give people the confidence to spend more of their savings through retirement,” Mr Boal said.
“A deferred lifetime annuity that would kick in when someone turned 85 or 90 would be a solution.”
Typically that would cost 10 per cent of retirement savings and would not have to be paid for straight away on retirement.
“People might retire at 67 and then decide in their 70s that they want the extra protection against ending up relying solely on the age pension,” he said.
“You’d still have 90 per cent of your retirement savings to spend and if there was anything left over it could go to the kids,” Mr Boal said.
ISA CEO Bernie Dean said the government needed to move on the taper rate.
“The perverse pension means test really means that those who saved more have less to spend. It provides a disincentive to save, it flies in the face of reason and is just plain unfair.”
The New Daily is owned by Industry Super Holdings