It doesn’t make sense to spend a dollar to earn 50 cents, does it?
Yet plenty of people still think they need to spend up big shortly before or when they retire to get as much Age Pension as possible, even if it makes them worse off overall. You might have even heard of people saying they’re going to spend everything then rely on the pension – but that means they’ve fallen for one of the biggest pension myths around. (Another popular fairytale is that you need $1 million to retire, and we’ve got more on that here.)
It’s true that if you haven’t reached Age Pension age and you want to claim another Centrelink payment, such as Newstart, there can be lengthy waiting periods for your payments to start if you’ve got a stash of cash.
But there are no waiting periods for the Age Pension, other than administrative ones, so there’s little point in running down your funds before you lodge a claim for payment. Instead, it’s possible to have the best of both worlds – a reliable retirement income and the Age Pension with the fringe benefits that come with it.
The maximum rate of Age Pension is $24,268 per annum for a single person and $36,582 combined for a couple in 2019. But once your income and assets reach a certain level, those pension payments start to reduce.
What many people don’t know is this – if you’ve got a modest amount invested, you could still qualify for the maximum rate of Age Pension. And it’s possible to have a significant amount invested before you entirely lose access to the pension.
How much? Centrelink is pretty clear about how its asset test and income test work. In short, a single homeowner won’t lose the pension completely until their income reaches $50,060 per annum or assets reach $574,500. For a couple who own their own home, the limits are $81,172 per annum in income, or assets totalling $863,500.
The family home isn’t included in the assets test, and some types of investments – such as account-based pensions, which are also sometimes known as allocated pensions – benefit from concessional treatment by Centrelink.
Gemma Pinnell, director of strategic engagement at Industry Super Australia, says those concessions can make account-based pensions the ideal investment for retirees. (You can read more about how account-based pensions work here.)
“Account-based pensions get very favourable treatment, because Centrelink doesn’t look at the income you draw or the actual return on the fund,” she says.
“Instead, they apply ‘deeming’ rules, where they assume you’re getting a certain rate of return on your account balance. And those deeming rates are much lower than the average 8.06 per cent a year over the five financial years to June 2019 that Industry SuperFunds returned.”
Centrelink’s deeming rates are reviewed from time to time (they were recently reduced to reflect the very low returns available from bank accounts and term deposits), with the current rates shown in the table below.
| Single | First $51,800 | 1.0% | Excess over $51,800 | 3.0% |
| Couple | First $86,200 | 1.0% | Excess over $86,200 | 3.0% |
As an example, a single retiree drawing the minimum 5 per cent drawdown of $5,000 each year from an account-based pension with a balance of $100,000 would be ‘deemed’ to be earning just $1,964. That’s because the first $51,800 of their balance would be assessed as earning 1 per cent under the deeming rules, and the next $48,200 to be earning 3 per cent.
Or a couple with $12,000 yearly income from an account-based pension worth $200,000 would be ‘deemed’ to be earning just $4,276 per annum (the first $86,200 assessed at 1 per cent, the next $113,800 at 3 per cent).
In both cases, if we assume there’s no other sources of income, both the single person and the couple would be entitled to the maximum rate of Age Pension.
An account-based pension is a simple way of keeping your superannuation invested after you’ve retired. And depending on your fund’s returns and how much you draw as regular income, your money could continue to grow.
“Income streams can also offer tax benefits,” Pinnell says.
The earnings of super funds are generally taxed at a maximum rate of 15 per cent. When you’re still in the workforce, that’s usually a lot lower than your marginal tax rate, which could be as high as 47 per cent (including the Medicare Levy).
But if you’re over the age of 60, the earnings of account-based pensions aren’t subject to any tax and your regular payments are tax-free as well.
Unlike with some retirement income streams such as annuities, your money isn’t locked away with an account-based pension. You can make withdrawals at any time, without being subject to tax or Centrelink penalties.
Of course, everybody’s situation is different, and before signing on the dotted line for an account-based pension, it’s worth getting an expert to run the numbers.
“Many Industry SuperFunds have qualified advisors who can assist their members free of charge with these decisions,” Pinnell says.