4 October 2016
Tony Negline Wealth Columnist
The new super laws — coupled with the age pension tests — discourage saving, especially for those earning average weekly wages. Here I will show why, using some examples.
We will assume you’re in a relationship, that you’re both aged at least 65 and own your home without debt. Our main area of focus will be your super assets, which is your major investment. In all our case studies we will assume you want a super pension from a non-public sector super fund which will pay you 5 per cent income — that is, you are happy to live off an average 5 per cent return on your total savings. Let’s also assume that all income is paid to you tax-free.
For the sake of simplicity we will assume that this super pension started after December 2014, which means the account balance is ‘‘deemed’’ under Centrelink’s income test.
Apart from your home and your super, you own $50,000 worth of personal-use assets, including your car. You have no other assets. All of our examples will consider the assets test thresholds that will apply from 1 January 2017.
Case study 1
You have $1.6 million in super assets. In this particular case you will receive no age pension and therefore your income is $80,000 per annum.
Case study 2
Let’s say you have $200,000 in super assets. Your super pension will pay you $10,000 and you will be eligible for the full age pension of $34,382, including the pension and energy supplements. Total income is therefore $44,382.
Case study 3
What happens if you have $500,000 in super assets? Well you receive total income of $45,732 — a part-age pension of $20,732 and $25,000 from their super pension.
Case study 4
What about $700,000 of super assets? They will receive a super pension of $35,000 and a part-age pension of $5132 which means their income is $40,132.
Case study 5
How about $1 million in super assets? They receive no age pension and need to live off all their super pension of $40,000.
What does all this mean? At it’s very worst it means you can have less assets but more income each year!
The perfect formula
What’s the sweet spot? It would seem to be about $339,143 in super assets. At this level your total income will be $50,236.
Let’s compare the income a couple with $500,000 in super assets receives ($45,732) with the $80,000 income a couple will receive if they have $1.6 million in super. Those with the higher balance have more than three times the assets but only receive 75 per cent more income.
The government says it is changing the super system to make it fairer and more equitable. These are the reasons for the $1.6m pension cap, the $250,000 income threshold for higher contributions tax, the lower contribution caps and the refund of contributions tax for lower income earners. Based on all our cases above, do these arguments really hold?
For those earning anywhere between 80 per cent and about 180 per cent of average wages — that is between $65,000 and $150,000 — it takes a lot of effort and sacrifice over many years to save a meaningful amount of money towards retirement.
After looking at our case studies, why would you bother saving anything more than compulsory super and living in the best home you can afford that it is very well maintained?
Anyone earning $50,000 each year, which increases at 2 per cent each year, and their super grows by 5 per cent after all taxes, fees and charges and receives compulsory super, will have $400,000 in super assets after 31 years of work. At that point if they were to retire they would receive 100 per cent of their pre-retirement income. Clearly there is a distinct disincentive for people in this situation to work for longer or to try to earn a higher salary.
The government wouldn’t be keen but maybe we need to go back to the drawing board. New Zealand has a universal age pension — called NZ Super — set at about 65 per cent of average wages and is subject to income tax. It is paid from age 65 regardless of your income.