Building up a big superannuation balance is a worthwhile aim for many people as they focus on retirement but there are a number of things to think about in developing a retirement plan.

Superannuation is an extremely attractive retirement vehicle because it comes with tax concessions while you are building it up and tax-free income once you retire and draw a super pension.

But for many people retirement income will include both income from super and the age pension. But the way these two combine can bring some unexpected results that need to be considered.

That’s because once you hit the minimum threshold in superannuation or other assets outside the family home, your age pension entitlement begins to fall. The trigger point for pension cuts is $451,500 in assets outside the home for a home-owning couple and $301,750 for a single. For non-home owners the trigger points are higher.

As the chart below shows, there is a significant income gap that opens after a couple saves around $800,000 jointly in superannuation between what they would have earned with less savings and a full pension and the gap lasts until super balances reach about $1.2 million.

The table above calculates that gap at its widest at $15,000. A couple between the  ages 65 and 74, who own a home, have superannuation assets of $450,000 and no other income-earning assets would receive a total income of $65,488 if they drew down their super at the mandatory minimum rate of 5 per cent and received a full pension.

That figure would fall to a minimum of $50,051 once the age pension peters out at super savings of $1,003,000. Once balances grow beyond that then income from super starts to catch up with what was lost in losing the pension.

Remember losing the pension also means losing the Pension Concession Card which is valued at around $3000 a year in reduced medical and other costs. But many retirees with no pension still qualify for the Seniors Card which delivers some benefits.

Don’t panic!

If you are approaching retirement and were counting on a pension but now realise you won’t get what you want there are things you can do. Firstly the 5 per cent mandatory annual super draw down figure is actually very low.

At that rate you will likely still be growing your pension.

Researchers Chant West say that the average balanced super fund – where most people invest – has averaged 7.6 per cent returns over 15 years so you could boost your super pension to, say, 7 per cent, and find yourself with much more money to spend than if your assets allowed you a full pension and your super would likely still grow over time.

There is a valuable concession Centrelink makes for superannuation and other financial assets held by pensioners. It uses a deeming rate of 2.25 per cent for assets above $100,200 for couples to determine their pension eligibility under the income test.

That means you could draw down 6 or 7 per cent of a super balance every year and have it assessed for the purposes of the income test as earning only 2.25 per cent. For a super balance of $700,000 a couple could draw down 6 per cent and get a super income of $42,000 that would turn into $65,000 once the pension entitlement was added.

Other plans

Once you have taken your super pension you can take out as much as you like and some people who are near the Centrelink full pension limit take money out to do other things.

“You’ve got to make a decision about whether you want to rely totally on Centrelink or whether you want to accumulate as much as you can and anything you get from Centrelink is just an added benefit,” said Wayne Leggett, director at Paramount Financial Solutions.

You can spend on yourself by taking a holiday or buying a car and caravan to go touring. Money you spend on yourself is not tracked by Centrelink but new assets are.

“Remember if you spend $100,000 on a car or caravan you are taking it out of one pocket and putting it into another as far as Centrelink is concerned,” Leggett said. That means the new assets would be in your asset pool at purchase price but would be depreciated as their sale price falls over time.

You can gift money to family or others but “you can only give $10,000 in one year and $30,000 over five years”, Leggett said. Money you gifted more than five years ago is no longer counted in your asset base by Centrelink.

Another option is to renovate, because your home is not counted as part of your asset base and an improved home could be sold in later years if money is needed.

Another option

Lifetime annuities are another useful option for reducing assessable assets, says Robert Goudie, principal of Consortium Private Wealth. “You could put $200,000 into a lifetime annuity and 40 per cent of that, or $80,000, would be exempt from the assets test,” Goudie said.

Those annuities are often market linked so they grow in value over time. Often the annuities are fully repayable if you die in the first 10 years of ownership and by reducing amounts after that.

Annuities pay annual income. In an example drawn up by Goudie for The New Daily a $200,000 bond would pay an annual income of $8,299 of which only 60 per cent would be assessable for pension entitlement.

The annuities can also be cancelled and repaid “if you decide you don’t need it any more for Centrelink purposes”, Goudie said.

Another option for asset reduction is placing $15,000 in a funeral bond that is also not assessable for the assets test. It is also well to remember that aged care bonds are not counted as an asset.

The New Daily is owned by Industry Super Holdings