Often when calculating retirement income, we make assumptions that are simply wrong. This is not necessarily caused by any lack of financial literacy. It’s because the rules can be less than obvious and no matter how much research we do, we can still miss something critical.
This was the case with two of Sharon Sheehan’s clients this week. Let’s call them Mark and Ros. Mark is 59, Ros is 63 and they have a Self-Managed Super Fund (SMSF) which Mark has actively managed over the years. He knows a lot about super, finance and retirement income, so they contacted Sharon as a way of double-checking their plans, rather than thinking they were headed in the wrong direction.
Sometimes it’s good to be wrong. And some of Mark’s assumptions weren’t quite correct. After learning more about their situation in a first meeting, Sharon was able to share a different option, one that would mean over the next few years they would be $50,000 better off. Here’s how it worked.
Mark’s role at work has just been made redundant. They are unsure if they can afford to retire. Mark will receive a $100,000 redundancy payment in December 2024, and he can access super when he turns 60 (in May 2025). Their joint super is $1,450,000 – Mark has $750,000 and Ros $700,000 – and they have another $75,000 in financial assets. They are (debt-free) homeowners, currently spend about $85,000 per annum and would like to live a ‘good’ life in retirement. They had two appointments with Sharon, in the first they shared a spreadsheet that Mark had created, showing a desired annual income of $90,000 through to age 90 (for Ros) and 86 for Mark.
Mark was keen to take advantage of tax concessions by moving his super to decumulation as soon as possible (age 60). You can find out more about this during an understanding super consultation.
In a second meeting this past week, Sharon was able to demonstrate how they can spend their desired amount of $90,000 per annum (today’s dollars) every year to ages 86 for Mark and 90 for Ros. Mark was aware that Account-Based Pensions (ABPs) are tax-free and so wanted to commence one in his SMSF, but he wasn’t aware of implications for Centrelink entitlements.
In the subsequent meeting they adjusted spending goals and wished to reduce their exposure to risk/ growth assets in their projections, so Sharon used a lower market risk level to do the calculations.
The big reveal
Mark was ready to start an income stream with his super to enjoy the tax-free account status, however Sharon shared that this affects his wife’s assets test assessment for an Age Pension when she reaches age 67, four years ahead of Mark. In short, his $750,000 super balance (when moved to an ABP) will put them over the Assets Test threshold, removing any chance of Ros qualifying for an Age Pension.
Sharon explained that superannuation is an exempt asset for someone under Age Pension age if it is in accumulation phase. It loses this exemption if an income stream is started.
BUT…
…income streams can be commenced upon reaching your Preservation Age at age 60 and rolled back into accumulation phase at any time.
The solution
Mark can commence an ABP now, then when Ros reaches Age Pension age, his ABP will affect her potential entitlements, so he will roll his ABP back to accumulation and take lump sums as and when he needs, as he has met the conditions of release being Preservation Age and retired.
It is critical to understand these rules. A common assumption is that an ABP is a forever commitment. It is not. You can move these funds back to an accumulation account (existing or open a new one) without penalty, but with the advantage of reducing assets for any Centrelink entitlements – in this case, the future 67-year-old Ros’ Age Pension.
Sharon calculated an entitlement for Ros (part Age Pension) of about $11,000- $13,000 per annum which means more than $50,000 extra income over this four-year period. The only downside is that yes, Mark will pay tax on earnings in his accumulation fund over this time, but this is a very small amount compared to the extra $50,000.
While their Age Pension entitlement is estimated to reduce once Mark’s super balance becomes an assessable asset four years later, they can still retain their Pension Concession Card. They are also likely to achieve their spending goals of $90,000 every year throughout their planning horizon (to ages 86 and 90). Some liquid capital (approx $180,000) is also estimated to remain at the end of their planning horizon, giving them a sizeable buffer for any unforeseeable expenses, while also using a lower market risk level in their projections.
Peace of mind
Both Mark and Ros commented on how much peace of mind Sharon’s solution will give them and that it was definitely worth the two meetings to achieve such a positive outcome. At one stage they had thought they might need a reverse mortgage to cover their full retirement journey but are now certain that this won’t be necessary. They also both agreed that one of Sharon’s major support skills is to help cut through the noise.
Did you know that you can start an ABP and then reverse this move if and when it suits your family Centrelink entitlements? A retirement forecasting consultation allows you to develop a safe spending plan and view projections of how your assets and income will look depending upon the scenario.
This article is provided by Retirement Essentials Representative Number: 001260855. We are an authorised representative of SuperEd Pty Ltd ABN 88 118 480 907 AFSL #468859. This information is not intended as financial product advice, legal advice or taxation advice. It does not take into account your personal situation, goals or needs and you should assess your own financial situation, consider if the information is suitable for you and ensure you read the relevant Product Disclosure Statement (PDS) if you choose to make any changes to your financial situation. It is always advisable to consult a financial adviser before making financial decisions.
Good Morning
between me and my wife dont have that much we have one small property and only half we own it is about $100.000 + 300.000 in term deposit. one property my daughter living in but it is in our name because they can’t get a loan we don’t profit from it. i don’t thing we get paid enough from our pension?
What is your view?
Hi Vince, we’d be happy to go over some calculations with you to see what kind of Age Pension you should be receiving compared with what you are currently receiving. CLICK HERE to book in a consultation with one of our specialists.
Hi, good work but what amazes me is that someone with $1.6 million in joint assets wants to go on welfare. They may have found $50k but that’s coming straight out of government coffers. Also how about costing the experience of dealing with Centrelink? Easy worth$50k to me to not go there!
Rachel , we agree with you. Why is the pension such a focus? We were told in our 20s that there would be no pension and worked towards being self sufficient. The Australian government cannot afford for people to keep getting the pension. Think of our young people and how hard they are finding the cost of living today. Think of their future. Use your own money to enjoy the rest of your life.
I agree entirely. To me it’s pure greed.
I totally agree with the above sentiments. While Retirement Essentials generally provide a good service, their obsession with extracting maximum pension for those who essentially don’t need it leaves me with a sour taste towards them. Quite frankly, you should have never posted this article even though it may be technically correct it is also morally wrong. Furthermore, the article should have been transparent and disclosed the net gain position, not just the gross gain. Hopefully government agencies read posts like this and close these loopholes down so that genuine pensioners could be perhaps better off.
Hi Bruce. Thanks for your comment. One of the things we find is that many people miss out on entitlements, and enjoying their best possible retirement, because they don’t understand the rules. Some of those people, such as in this article, are reasonably well off but most aren’t. We help people to navigate the complex Age Pension and superannuation systems and explain the rules to help all our readers get a better outcome. You are right that some people have less need for the Age Pension but we try and help as many people as we can. Thanks again for your feedback.
My husband and I receive a part pension now as we are under the assets threshold and income test. If our assets rise, because of Super, to over this threshold of 1,045,000, can we still keep the pensioner concession card?
Hi Sheree, the Age Pension and Pensioner Concession Card go hand in hand so you are receiving a pension/have a PCC but then lose eligibility then the card is cancelled.
How often should I update assets list and bank balances
Hi Toni, Centrelink’s guide is to update them any time you have an increase or decrease of $2,000 or more. How often you do it though is entirely up to you, some of our customers do it every month, others every year. Most do it roughly every 6 months.
I agree with Rachel and Kerryn
It seems immoral for people with over a million and a half in their super to still want help from the government. I thought pensions were for those who REALLY need income support.
This sounds like another legislation loophole that wealthy people take advantage of. Just because you can do it doesn’t mean you should do it. Don’t be so gready!
Does that include your super too? Doesn’t Centrelink get advised bi-annually by the super fund industry? Other wise as it goes up and down daily on a regular basis and you need to advise every $2000 up or down you would be contacting Centre link daily.
So how do you go about reporting super asset?
You may lose the pension concession card but, in its place, you could qualify for the Commonwealth’s Seniors Health Card instead.
If you move the funds back to accumulation does that have any affect on how much you can contribute as non-concessional?
Hi Kerrie, generally speaking this is fine and there is no impact on non-concessional contributions but it is always best to confirm with your specific super fund to be certain.
Hi
In the above example, isn’t it possible for Mark could move most of his money back into accumulation, but leave of equivalent value to the suggested lump sums in his ABP?
This would count against Ros’s pension, but no more than the lump sum and would presumably earn a better rate of return than the lump sum I would think.
Is this correct?
How would an asset test work if one is a company director draws no salary and the company assets in $ in the bank is 300,000?
In this scenario the super $ is 200,000 with no other assets than the residence home?