30 June 2017
Glenda Korporaal – Associate Editor (Business) Sydney
The combination of the government’s cuts to age pension qualifications and tighter super-annuation rules this year will mean a couple can be better off financially with only $400,000 in super than with $1 million in savings, according to a paper produced this week by superannuation experts.
The paper, produced by Melbourne QC Jack Hammond, founder of lobby group Save Our Super, and former Treasury official Terrence O’Brien, argues that the combination of the changes to super and age pension eligibility, which come into effect this year produces a “retirement and income savings trap”.
The combined impact of the changes has been described as “Retirementgate” by SuperGuide superannuation commentator Trish Power.
The Hammond-O’Brien paper shows that a home-owning couple with $400,000 in super, when combined with the aged pension, can earn more than a couple with $800,000 to $1 million in super whose assets mean they don’t qualify for the pension.
The paper, produced for SuperGuide, argues that the retirement savings “sweet spot” is now $400,000 for a home-owning couple. With $400,000 in super, the couple would be eligible to receive 94 per cent of the aged pension, delivering them a total income of $52,395 a year.
But as the couple’s assets rise, the pension tapers off and then cuts out altogether under lower rates that took effect from this January.
“Under the new rules, regardless of whether you saved $600,000 or $800,000 or even $1m, you cannot secure more (in income) than what you secure with $400,000, until you have at less $1,050,000 in super,” Ms Power says in an analysis of the paper this week.
At this level, the homeowning couple would be relying solely on their savings from super with no eligibility for the aged pension.
“Financially, it is better to have $400,000 in super than $600,000, or even $1m in super, due to the harsh effect of the aged pension assets test,” Power says.
“Doubling the effect of the age pension taper rate from January 1 this year means Australian couples are effectively taxed 150 per cent for lifetime super savings between $400,000 and $800,000.”
The paper by Hammond and O’Brien, which is now on the Save Our Super website, is titled: “A retirement income and savings trap caused by the Coalition’s 2017 superannuation and aged pension changes.”
It argues that, as a result of the lower superannuation contribution caps that come into effect from July 1 on Saturday, from a maximum of $35,000 to $25,000 a year, it would take 26 years for a person to overcome the “savings trap” to take their superannuation savings up from $400,000 to more than $1,050,000.
Ms Power calls the impact of the combined changes “Retirementgate” and predicts it will lead to a “stampede” by retirees to spend their savings on cruises and other holidays and in renovating their home to reduce their savings to make sure they qualify for the pension.
“Australia’s retirees have been conned and are now being punished for saving for their retirement,” she says.
The stricter pension asset test rules were announced by the Coalition government in the 2015 budget and came into effect in January this year.
This was followed by changes to superannuation policy announced in the May 2016 budget, which come into effect from this weekend.