Source: https://www.superguide.com.au/how-super-works/retirementgate-revisited-australian-couples-singles-punished-saving
Timestamp: 2018-04-23 15:08:03
Document Index: 737493046

Matched Legal Cases: ['art 1', 'arts 2', 'art 1', 'arts 2', 'art 2', 'art 3', 'art 4', 'art 5', 'arts 1', 'art 1', 'art 2', 'art 3', 'art 4', 'art 5', 'art 1', 'arts 2', 'art 2']

July 20, 2017 by Trish Power 20 Comments
Age Pension (and super) changes may determine next federal election
Retirement savings ‘sweet spot’ for singles and couples
1. Homeowning couple: $400,000 savings sweet spot
2. Non-homeowning couple: $650,000 savings sweet spot
3. Homeowning single person: $300,000 savings sweet spot
4. Non-homeowning single person: $550,000 savings sweet spot
Table: Retirement savings sweet spot for couples and single people
General conclusions (from Save Our Super)
Assumptions used in table, chart and analysis
Note: This article discloses the retirement savings ‘sweet spot’ (optimal super balance for securing maximum income when combining super and Age Pension payments) for 4 categories of Australians – homeowning couple, homeowning single person, non-homeowner couple, non-homeowner single person. See summary table, charts and explanatory text later in the article.
In June 2017, we reported on disturbing findings from a paper originally produced for SuperGuide, by advocacy group, Save Our Super. The predominant finding from the paper was, that due to the harsh January 2017 changes to the Age Pension assets test, many Australians would be financially better off accumulating savings only up to a certain level, and then relying more on the Age Pension.
Quoting from our June 2017 SuperGuide article Treasurer Morrison’s ‘Retirementgate’ encourages Aussies to spend and take Age Pension: “For a retired couple who own their home, the practical effect of the 2017 Age Pension changes is that you receive more total retirement income (including Age Pension) with $400,000 in super, than you do with $800,000 in super, or even $1 million in super. Under the new rules, the most desirable savings targets are $400,000 or $1,050,000, and to accumulate over this $650,000 divide using the post-July 2017 concessional contributions limits would take 26 years.”
At SuperGuide, we have named this policy debacle as ‘Retirementgate’. In short, the retirement savings ‘sweet spot’ is $400,000, OR more than $1 million, for a retired home-owning couple, and nothing in between, due to the effect of the harsher Age Pension assets test. (Since 1 January 2017, retirees have lost $3 of Age Pension a fortnight for every $1,000 over a certain assets threshold, compared with only losing $1.50 of Age Pension for every $1,000 over the threshold before January 2017.)
Australian couples with more than $400,000 in retirement savings are effectively taxed at 150% for lifetime super savings between $400,000 and $800,000, according to the Save Our Super paper.
The long-term effects of this astounding finding from the Save Our Super paper, is that there are now incentives for Australians to change their saving behaviour by relying persistently on a significant part Age Pension. According to Save Our Super, such a change in behaviour will reverse over time the government’s claimed budget improvements, and damage the sustainability of the retirement income structure. By crimping Australians’ aspirations to achieve rising real living standards in retirement, the long-term effects of these measures will necessitate further change to policy. Save Our Super believes this uncertainty is a threat to the retirement planning of millions of Australians.
In our three SuperGuide articles (published in June 2017) covering this important paper, we provided an illustration of this issue from the perspective of a retired couple who owned their home. We have had a huge reaction from SuperGuide readers and also from the broader media, including questions about whether there were comparable retirement savings ‘sweet spots’ for single people, and for retirees who do not own their homes.
Thanks to Save Our Super and its use of Sean Corbett’s financial modelling, we can also illustrate the scenarios for single people and non-homeowning retirees. See later in this article for a summary table, charts, and explanatory text disclosing the savings ‘sweet spot’ for 4 categories of retirees.
I am sure I am not the only one wondering what type of government would introduce a policy that financially penalises Australians for saving for retirement. Ironically, as Save Our Super highlights, the policy that commenced in January 2017 is not a bold new policy experiment: rather, it is a return to a policy that was a tried and proven failure before the 2007 Simplified Superannuation reforms. The government’s action or inaction in correcting this issue will undoubtedly have a significant influence on the next federal election.
An important point to remember is that this measure would not have got through parliament without the support of the Greens. Although the Greens may have environmental credentials, I very much doubt the infamous decision to vote through the harsher Age Pension assets test without sighting long-term modelling will be hailed as one of their finest political moments.
As Save Our Super has argued, the impact of policy change on the federal budget and on retirement living standards is inescapably a long-term issue requiring examination over a time horizon of 40 or more years. According to Save Our Super, such modelling was published for the 2007 reforms (introduction of tax-free super and removal of benefit limits), but has not been forthcoming for the 2017 changes.
In SuperGuide’s view, the introduction of the 2017 measures without long-term modelling of the impact of such measures, is an expensive mistake, and needs to be seriously reconsidered. Although reversing or modifying the Age Pension assets test changes may cause short-term embarrassment for policy makers and political leaders, such action I suspect is better than being voted out of government, or losing your job.
See the next section for a summary table, charts and explanatory text disclosing the savings ‘sweet spot’ for 4 categories of retirees.
Note: For background information on how this policy debacle, Retirementgate, plays out, see the following SuperGuide articles:
In response to many requests for more information on the financial implications of the harsher Age Pension assets test on current and future retirees, the authors of the original paper, Jack Hammond QC and Terrence (Terry) O’Brien (former Treasury official), with the assistance of Sean Corbett’s modelling, have kindly compiled further analysis for the following four categories of retirees:
Single person, homeowner
Single person, non-homeowner
The explanatory text, table and charts below illustrate the savaging of retirement incomes, and the dismantling of long-term retirement income policy by the current government.
The assumptions used in the table, charts and analysis below appear at the end of the article. Note that Chart 1 (see later in the article) reflects the corresponding retirement balances appearing in Charts 2 to 5. For example, Case 6 ($400,000 super balance) in Chart 1, is the super balance for Case 6 in Charts 2 to 5.
Note: Save Our Super has made it clear that the organisation is not arguing that individuals should limit their lifetime saving: “We are simply observing that because perverse incentives have been created by the Government’s 2017 policy changes, some people will, in practice, quite logically follow those incentives to limit their savings assessable under the Age Pension assets test. This only needs to happen at the margin to create problems for sustainability of the Age Pension and for the policy framework determining the interaction between the Age Pension and the superannuation system”.
Although analysis for homeowning retired couples has been provided in previous articles, for completeness and for convenience we include a summary of this analysis in this article.
According to Save Our Super, incentives created by the federal government, now encourage Australians to self-limit lifetime retirement savings: a homeowning couple is encouraged to self-limit savings assessable under the Age Pension assets test to $400,000, which will enable the optimum use of the Age Pension. With $400,000 in super, a homeowning couple can receive 94% of the full Age Pension, delivering a total income of $52,395 (based on September 2016 Age Pension rates). Under the harsher Age Pension assets test, regardless of whether a homeowning couple saved $600,000 or $800,000 or even $1 million, they cannot secure more than $52,395 until they have $1,050,000 in super and are relying solely on their super savings. A homeowning couple are hardest hit when they hold $800,000 in super, and at this level of savings they receive less total income (super pension income and Age Pension payments), compared with a similar couple holding only $400,000 in super. See table below.
According to Save Our Super, incentives created by the federal government, now encourage Australians to self-limit lifetime retirement savings: a non-homeowning couple is encouraged to self-limit savings assessable under the Age Pension assets test to $650,000, which will enable the optimum use of the Age Pension. With $650,000 in super, a non-homeowning couple can receive 82% of the full Age Pension, delivering a total income of $60,833 (based on September 2016 Age Pension rates). Under the harsher Age Pension assets test, regardless of whether a non-homeowning couple saved $800,000, or $900,000, or even $1 million, they cannot secure more than $60,833 until they have $1,250,000 in super and are relying solely on their super savings. A non- homeowning couple are hardest hit when they hold $1,000,000 in super, and at this level of savings they receive less total income (super pension income and Age Pension payments), compared with a similar couple holding $650,000 in super. See table below.
According to Save Our Super, incentives created by the federal government, now encourage Australians to self-limit lifetime retirement savings: a homeowning single person is encouraged to self-limit savings assessable under the Age Pension assets test to $300,000, which will enable the optimum use of the Age Pension. With $300,000 in super, a homeowning single person can receive 83% of the full Age Pension, delivering a total income of $33,958 (based on September 2016 Age Pension rates). Under the new Age Pension rules, regardless of whether a homeowning single person saved $400,000 or $500,000 or even $600,000, they cannot secure more than $33,958 until they have $700,000 in super and are relying solely on their super savings. A homeowning single person is hardest hit when they hold $550,000 in super, and at this level of savings they receive less total income (super pension and Age Pension payments), compared with a similar single person holding $300,000 in super. See table below.
According to Save Our Super, incentives created by the federal government, now encourage Australians to self-limit lifetime retirement savings: a non- homeowning single person is encouraged to self-limit savings assessable under the Age Pension assets test to $550,000, which will enable the optimum use of the Age Pension. With $550,000 in super, a single person who doesn’t own their home, can receive 66% of the full Age Pension, delivering a total income of $42,549 (based on September 2016 Age Pension rates). Under the new Age Pension rules, regardless of whether a non-homeowning single person saved $400,000 or $500,000 or even $600,000, they cannot secure more than $33,958 until they have $900,000 in super and are relying solely on their super savings. A non-homeowning single person is hardest hit when they hold $750,000 in super, and at this level of savings they receive less total income (super pension and Age Pension payments), compared with a similar single person holding $550,000 in super. See table below.
Maximum Age Pension (rates as at September 2016)
“Sweet spot” (maximum combined income from Age Pension and super drawdown)
“The Pits” (trough in total income)
“Ahead at last” (super balance at which 5% drawdown overwhelms loss of part Age Pension)
Width of savings trap
Maximum part pension plus 5% super drawdown
Super balance at sweet spot (to nearest $50,000)
Part pension as proportion of total pension
Corresponding super balance
Corresponding super balance to super draw down of 5%
Couple, homeowners (Chart 2) $34,477 $52,395
$400,000 94% $41,251
$800,000 $1,050,000
Couple, not homeowners (Chart 3) $34,477 $60,833
$650,000 82% $51,251
(Case 18)
(Case 23)
Single, homeowner (Chart 4) $22,867 $33,958
$300,000 83% $27,500
Single, not homeowner (Chart 5) $22,867 $42,549
$550,000 66% $37,500
(Case 16)
Disclaimer: The calculations illustrate the general rules on how the Age Pension income and assets tests apply to different levels of superannuation savings. The table, charts or analysis is not to be construed as advice to any particular retiree. Individuals should seek specialist financial advice on their particular circumstances.
According to Save Our Super, there is a wide ‘savings trap’ in all 4 cases — between $350,000 for a single non-homeowner and up to $650,000 for a couple who own their own home (see Charts 1 to 5 below). In all 4 scenarios, there is an incentive to plan for a retirement strategy based on a substantial part Age Pension, ranging between 66% for a single non-homeowner to 94% for a couple owning their own home. For all 4 scenarios, much greater super saving can generate a significantly smaller total retirement income than the ‘sweet spot’ strategy.
Note: According to Save Our Super, a couple who own their own home face the largest perverse incentive in absolute terms, where doubling the amount saved by $400,000 can reduce total annual income by roughly $11,000.
Save Our Super explains that the savings traps differ for the 4 scenarios due to the fact that individuals eligible for the full Age Pension get the same Age Pension payment regardless of whether they are homeowners or not. Save Our Super says: “Couples eligible for the full Age Pension each receive a lesser pension payment than an individual, also regardless of whether they are homeowners or not. As a couple, they receive more than an individual, but not twice as much. The Age Pension assets test allows more assets to a non-homeowner than to a homeowner before it starts to reduce access to the full Age Pension. It allows the same margin of higher assets (just over $200,000) to both individuals and couples. (The amount of extra assets it allows the non-homeowner appears less than the value of a typical home for either a single pension or a couple in many urban markets.) The interaction of these two factors — different payments per person for single individuals and each individual in a couple, plus different assets test allowances according to home-ownership status — drive the differences in sweet spots and the width of the savings traps across the four household types.”
Chart 1: 25 illustrative superannuation balances on retirement at age 65
Chart 2: Retired couple age 65-74, homeowners
Chart 3: Retired couple age 65-74, not homeowners
Chart 4: Single retiree age 65-74, homeowner
Chart 5: Single retiree age 65-74, not homeowner
The authors of the table and charts above have drawn up the scenarios using the same assumptions that are used in the Retirementgate articles explaining the implications of the harsher Age Pension assets test for a couple who are homeowners (see list of articles after this section). These assumptions are:
Age Pension rates are those as at September 2016.
A persons’ assets-testable savings are treated as being wholly in superannuation (i.e. no ‘personal use’ assets).
Superannuation drawdown is assumed to be the minimum required: 5% per annum applying for retirees between the ages of 65 and 74.
The results are reported to the nearest $50,000 in savings: charts above use savings increments/superannuation balances in steps of $50,000, which means the precise ‘sweet spot’ might fall somewhere between such increments.
The table uses the same terminology as appears in article, (Retirement income and savings trap caused by Coalition’s 2017 superannuation and Age Pension changes).
The table refers to ‘cases’ which are the numbered examples of superannuation balances in Chart 1, and Charts 2 to 5 illustrate these cases for the 4 scenarios. In Chart 2, Save Our Super refers to the ‘sweet spot’ of maximised part Age Pension plus superannuation drawdown; the pits’ which is the trough of lower income from elimination or near-elimination of the part Age Pension plus higher drawdown from considerably higher superannuation saving; and finally ‘ahead at last’, the point at which drawdown from much higher superannuation savings rises above the combined Age Pension plus superannuation drawdown at the ‘sweet spot’.
For more information on Retirementgate, see the following SuperGuide articles:
For information on how the Age Pension rules work, see the following SuperGuide articles:
Age Pension Federal Budget and superannuation How much super do I need? Making superannuation contributions Retirement strategies Retirementgate Superannuation benefit payments tax Superannuation strategies Taking a super pension Tax-free super
I think Super is going to continue to be a big problem until we address 2 issues.
Point 1: Any super rule changes have to be announced “and locked in” 3 years before they take effect. Super and most investing are based on long term planning, time to put things in place and then many many years of saving in a certain way to achieve your Goal… only to find when your nearly there – someone has moved the Goal Posts!
Point 2 : When are going to have one set of super rules that apply to everybody equally in this country. Everybody including Public Servants, Judges etc and Politicians should have to give up their guaranteed benefit super schemes and move onto accumulation Funds, where they personally feel the impact of any “rule changes”.
Trish ? or anybody, do we know how many millions in capital would it take to support the pension of an average senior Public Servant, a retired Judge, Backbencher’s Super pension let alone an ex PM’s penion ?
Ex long term Liberal voter
I have to bring to your attention some anomalies in the article. Not withstanding your explanation of the method used to i.e all assets are show as superannuation.
There are a number of issues with this scenarios . We are over the present asset benchmark of $827000 and therefore do not receive any pension or other benefits associated with the pension. However these assets are not all superannuation being super, bank, shares, car, household effects, etc. as a consequence this precludes the use of the so called sweet spot because to come down to the $400.000 benchmark you suggest would not
be so simple as it is suggested because the amount in super would not give the 5% drawdown amount you suggest. The remaining monies would not earn 5% in the present climate, and some of the asset does not earn any return. Therefore as a consequence of these changes we have had our income reduced by $14000 per year with no way of making it up from our assets.
Trust you understand the issue here the scenario is not as simple as suggested.
Under the new assets test, the age pension is reduced by $3 per fortnight for every $1000 of assets over the threshold. That is $78 over a year. Couples and singles, home owners and non-home owners all have different threshold but the rate of pension reduction is constant.
If a pensioner won or inherited an additional $100,000, their pension would be reduced by $7,800 per year. That represents 7.8% of their additional capital. Unless that new capital can generate 7.8% income or more, these pensioners will find that although they have more capital than before, they actually have less income than before. The urge to maximize the age pension explains the incentive to reduce capital in assets that are assessed for the assets test. It also explains the incentive to increase capital in non-assessable assets such as the family home. Hence the rush to up-size, upgrade or renovate.
However, if this pensioner could achieve an income return of over 7% (which is difficult but not impossible) any additional capital would not reduce their income by very much but that pensioner would also have the benefit of extra discretionary capital that they could dispose of as they wished over their retirement. It may also be very beneficial if that money was required for entry into aged care in the future.
Prudence suggests that before capital is hurriedly dissipated in order to maximize the age pension, serious consideration should be given to capital needs in the future.
What surprises me is that well before January 1st 2017 the change to the assets test was well promulgated by Morrison. I knew about it then and all of you should have known about it also! So where were you then? I was writing to my members of parliament, were you?
R Lind says
The assumption in all of this is that you maximise your income for estate building and saving and just live on the income. Where in all of these assumptions is there that a person with $800,000 has $400,000 more than a person with $400,000 to spend? Over 20 years this is at least $20,000 a year. There are many retirees who are using their money to live and spend in excess of what you term as income.
great article and great comments thank you ,I have started to spend up ,why not ,,
Indeed, I’m coming to the same conclusion. We don’t live forever.
A big assumption here is that the capital value of super assets (in a tax free environment) will not grow but simply stagnate and an annual super pension of 5% will be drawndown against the capital. Elsewhere in the July 2017 newsletter in a discussion of the 10/30/60 rule the point is made that historically 60pct of retirement income comes from the investment returns achieved during retirement.
So on average over the period of retirement you can expect that your super capital even as it diminishes will achieve returns as high if you were still in pre-retirement.
A rational investor would seek to maximise the pot of capital on retirement knowing that her capital will continue to earn a return over and above drawdowns for a considerable period into retirement. Why would anyone 20-30 years away from retirement deliberately not maximise her super and rely on a pension regime that will in most likelihood be radically different from the current system?
I can’t help but suspect that all the angst is more about a privileged and minority cohort losing access to a part pension than concern about impacts on the budget and “perverse” incentives to game the system.
I think you miss the whole point of the article. It is about people being disincentivized from contributing more than $400,000 into super as there is no real benefit in doing so unless you are lucky enough to be able accumulate more than $1,050,000.
Tony, How is a person “privileged” with income $28,000 (drawdown from super contributions all made from AFTER-TAX earnings & partpension), fixed expenses $9500, a child still at Uni & takes 4/5 weeks to save for a tradesman for a day’s work if something goes wrong apart from materials cost?
Today’s employees are privileged due to the $18,200 tax-free threshold which was $5400 for most of our working lives so a reduction to that or to threshold of $6000 at 2000/01 would have helped 2015 Budget from whence the part-pension reduction emanated, instead they clobber those with no ability to replace that part-pension reduction.
Rosemary, I think possible to repeal legislation otherwise UK would still have Windows Tax of 1696 tho it did take 155yrs to repeal so not holding breath.
Hector, I believe the answer is no. The legislation cannot be undone.
And my question is, is there an economic advantage to divorcing, buying two houses and living separately 🙂
The article correctly comments on the potential for some to game the super system to maximise their benefits (as is their right). Any system can and will be so gamed, given self-interest prevails over altruism or an elightened long term outlook that matches the longer time horizon.
Anyone who tries to so game the regime risks being caught out by the inevitable (almost guaranteed) furture changes as policy-makers play catch up with the fallout of perverse behaviour thorogh further rule changes. The article commits the fundamental fallacy of assuming status quo of current rules. No one knows what the future rules will be, but everyone knows they will change to protect revenue.
Given probable personal variations (health, finance, family situation, relationships…), the optimal path is to protect oneself through sensible savings leaving scope for flexibility to adapt to future. Not easy admittedly, but better than relying on the lottery of current rules remaining unchanged.
Hector, I think you’ve nailed it.
I wonder if Trish has a mate akin to ‘the Castle’s hot shot that took on the Feds and won’.
Allan C, I believe Jack of ‘Save our Super’ is the legal hotshot, a legal challenge would be interesting so let’s hope he’s reading everyone’s comments.
We’re a traditional life long Liberal voting pair of part pensioners who are in the $800k zone. If the libs really believe that after chopping a $250 a week off oldies like us and then expect that we’ll come out and vote for them ever again (state or federal) then they’re delusional. We’ll be overseas having a spend up when the next election is called. Coastal Liberal held marginals will change the result at the next election. They’ll figure it out sooner or later.
I was encouraged to increase my super balance so worked for extra 3 years to build up the balance. Now I’m hit with 150% retirementgate tax.
Clearly this is retrospective legislation.
great comment, Hector (and question) 😉
anyone have any suggestions as to the next step regarding a legal challenge to the legislation ??
A very good question Hector!
The revised assets test legislation was passed in the Senate with support from 2 greens later found to be ineligible. Does this open the legislation to legal challenge?
Hector——-it jolly well should. If they can’t work out or check who is eligible to stand & then sit, one has to wonder if the Treasurer and his staff can add 2 plus 2 to have reached this cockeyed set of figures.