OUR new superannuation system with its series of caps and reduction in pension access has thrown up an unlikely outcome - the contradiction that you may be better off having less money saved if you want a more comfortable retirement.
If you play your cards right and work the rules, you can hit a savings sweet spot and maximise your retirement income through a mix of private savings and age pension. Not only that, but you also may be able to retire seven years earlier than you thought.
In 2006, the super changes brought in by the Howard government simplified the retirement system that over time had built up a large number of complexities such as reasonable benefit limits.
Save Our Super head Jack Hammond, a retired QC, said: "The rules were set in a strategic framework of lengthening life expectancies, rising incomes and expectations of higher retirement living standards, so that people could save for themselves, with declining reliance on the age pension."
The more you saved, the more you would have in retirement. The age pension would kick in to supplement your base level of income but wasn't designed to replace the incentive to save and become self-funded.
Today Hammond believes super and Centrelink changes are counter-intuitive and "short-sighted, lacking proper long-term modelling, and have resulted in the odd way we have with the way retirement income is received".
"It's been a race to the bottom as both major political parties turn superannuation at best into a budget proposition rather than a long-term savings policy that it was designed to be," he said.
From January 1 this year the means testing of pension benefits changed. The government reduced the maximum amount of assets you can have while still receiving a part age pension. In addition, it accelerated the rate of reduction in pension entitlement for those with assets over the cap for a full age pension. They changed from $1.50 reduction in fortnightly pension for every $1000 of assets over the cap to $3 reduction for every $1000 over.
Where does the money come from?
People in retirement usually generate income from two sources - the first is accumulated savings, such as investment property, term deposits and super accounts; the second is the age pension.
For a home owner couple who meet all other eligibility rules, assets below $380,500 (excluding the family home) result in a full age pension, while a part age pension is received with asset levels up to $830,000. Previously, up to $1,178,500 in assets could be held before the pension was cut off completely.
The result - retirees who have reached age pension age are caught in a trap where they are penalised for having built up more savings by having their age pension cut off much faster, and at much lower asset levels.
Save Our Super, with the help of Sean Corbett, an economist with more than 20 years' experience in the super industry, has modelled retirement income levels based on a mix of age pension benefits and draw down of super at a rate of five per cent a year, the legislated annual minimum draw down percentage for those 65 and older.
They found that depending on your marital status and housing situation, there were optimal levels of savings to maximise retirement income via a mix of super and age pension benefits.
- Single person with home - no more than $300,000 in super to get $33,958 a year income.
- Single person renting - no more than $550,000 in super to get $42,549 a year income.
- Couple with home - no more than $400,000 in super to get $52,395 a year income.
- Couple renting - no more than $650,000 in super to get $60,833 a year income.
Disadvantage of having more assets
For a couple who own their house and have $800,000 in super, their estimated annual income is $41,251, whereas if they have only $400,000 in super their estimated annual income increases to $52,395. This is because a couple with $400,000 in super would get 94 per cent of the full age pension payment, while a couple with $800,000 in super would get just over one per cent of the full age pension payment.
So here is a legitimate strategy - to access super tax free, you must be over 60, fully retired and receive a super pension, technically known as an account-based pension. But to receive the age pension, for those born after January 1, 1957, you must be 67.
Knowing where your savings sweet spot is likely to be at 67 allows you to plan early and potentially have an early retirement, drawing down on super in those earlier years of retirement to hit the sweet spot by 67. In other words, if you had $800,000 in super at 60, you potentially could retire at 60, spend $400,000 on living expenses, travel and renovating your home. When you reach 67, you have worked your super balance down to $400,000, which is the savings level sweet spot for a couple who own their home.
Crucially, this is if you're happy with the sweet spot income, which is $52,395, you are willing to rely on the government not changing the rules again, and you do not aspire to having substantial savings that you can dispose of as you like.
There is also a breakthrough point on the upper end whereby you can generate more than the savings sweet spot level of income, but the wealth needed is quite a jump. For a home owner couple, to generate more than $52,395 a year income you are estimated to require at least $1,050,000 in super.
Accumulating as much money as possible for retirement is always the most financially sensible thing to do. However, based on present rules, if you don't make it to $1 million in your superannuation account, you may end up with more income and a better retirement with less than half that amount.
James Gerrard is the principal and director of Sydney financial planning firm FinancialAdvisor.com.au.