Don’t let complex super and pension rules get you down

You can start bringing your retirement dream to life as many as five years ahead of time, by setting a firm retirement date that lets you start truly envisioning life after work.

To do this, though, the first thing you need to know is the rules around when you can access your superannuation savings.

The rules are a key determinant of your retirement date because you have little chance of accessing your super early – that option is only available to people with specific medical conditions or who are suffering extreme financial hardship.

Most people can crack open their super pot at the age of 65 – regardless of whether they’re still working – or at their ‘preservation age’.

Your preservation age – effectively, the youngest age at which you can access your super – depends on your date of birth; for people born before July 1, 1960, the age is 55, while for those born after July 1, 1964, the age is 60.

Industry SuperFunds has a free, online tool that will quickly tell you your preservation age, based on your birth date.

Your preservation age is different to the age at which you can receive the government-provided Age Pension, if you’re eligible. If you intend to rely on a part-pension to supplement your retirement income, understanding upcoming changes to the Age Pension age is equally important.

The pension age currently sits at 65 but will change to 65 years and 6 months from July 1, 2017, and will continue to increase by six months every two years until July 1, 2023, when the eligibility age hits 67.

The interplay between superannuation and the Age Pension is quite specific to your personal circumstances because it depends on your assets, super balance, the income you intend to receive from your super, and the income stream choice you make at retirement.

For example, Barbara* is single and worked part-time as an administrative assistant before retiring at 65. She relies almost entirely on the Age Pension but uses her $50,000 IndustrySuperFund balance to provide an additional $2,700 a year in income. Her decision to take a small extra income and keep her fund invested means that at age 70, she now has a balance that’s more than $10,000 higher than when she retired, allowing her to top up her pension with additional income for longer than she otherwise would have.

Meanwhile, Debbie* is the same age as Barbara and also retired at 65, but she has been a teacher for most of her life so had $400,000 in her IndustrySuperFund when she finished work. She’d planned to rely on her super for a retirement income but learned that if she chose to take an annual income of $21,700 while keeping the fund invested, she was also eligible for a part-pension. She can choose to increase her income from super later.

Once you’ve determined the date at you can access your various forms of retirement income, and worked out the rough income you’ll receive from both your super and the pension, your next move should be to address any savings shortfall.

If it looks like you won’t receive sufficient income to achieve the retirement lifestyle you’ve targeted, additional concessional or non-concessional super contributions are a good way to boost your super savings in the years close to retirement.

However, these balance-boosting contributions are subject to a cap, and those caps are due to change.

From July 1, new rules will come in that will cut the value of the annual, additional after-tax contributions you can make to $100,000, from $180,000, unless you’re aged between 65 and 74 and continue to be employed for at least 40 hours during a 30-day period each financial year.

Savers of all ages with a minimum of $1.6 million in their super will be prevented from making after-tax contributions entirely.

Concessional, or before tax, contribution caps will also change on July 1, from $35,000 for workers aged 49 or more, to $25,000.

This is all part of a new concept called your ‘total superannuation balance’ that also impacts contributions you can make to a spouse’s super, what you can offset against tax and other super-related decisions.

Your super fund provider or financial adviser can provide more detail on how specific rule changes will affect you as an individual, and whether you can take advantage of various opportunities to maximise your contributions before the new rules are in place.

It’s worth remembering, though, that an increased super balance may impact your eligibility for the Age Pension. That’s because your super balance is, in many circumstances, counted as an asset under the Centrelink assets test that determines whether you’re eligible for benefits. It can also be counted under the Centrelink income test in some circumstances. Again, a financial adviser can help with this.

The interplay of superannuation- and Age Pension-related rules is complex, but understanding it is crucial to maximising your income in retirement and achieving the lifestyle you picture for yourself.

Did you ensure your super arrangements worked well with the Age Pension?

*Retirement stories supplied by Industry SuperFunds. More information can be found here.