Superannuation - make it work harder for your savings

We recently reported on a statement by Aaron Minney, head of research for annuities provider, Challenger, which we believe is a massive game changer. Aaron said that it’s important for retirees to stop viewing their super as a ‘nest egg’ and to consider it, instead, as a ‘pay packet’.

A handy wake-up call?

This involves a critical shift in understanding. Of course we’ve all heard for years that we need to save harder and harder. And it’s difficult to encourage humans to suddenly turn on a dime and start to spend these hard-earned savings. But the corollary – hoarding your savings until you die – isn’t the best solution either. We’ve written a lot about the transition from the saving to spending phase of retirement. But today we want to share ways of making the most of your savings so you have more to spend. This will help increase your comfort factor, which means that moving to spending phase could therefore feel much easier.

We sought advice from the Retirement Essentials financial advisers as well as our Customer Support Team who help those in need with entitlement queries. Nicole, Megan, Sharon and Steven are very attuned to the ways that retirees and pre retirees can maximise their savings. Here are their top five suggestions and how they have worked for members of Retirement Essentials.

1. Start at the beginning!

Start by checking and maximising any entitlements. Here’s why. We received a nice note from Geraldine last week, saying our reminder to check her entitlements prompted her to do just that:

‘Thanks for this timely update with links on how to check your eligibility. Before I contacted your team earlier this year, I had no idea that I was eligible for the Age Pension so my session with you was not just helpful, but fruitful. I have missed out on over a year of a part-Age Pension, but onwards and upwards from now on!’

Unfortunately those payments cannot be recovered because Geraldine had not applied, but she will start getting her part Age Pension imminently. So checking your entitlements regularly is really important. 

Steven Sadler, also known as our Entitlements Guru, works with members every day to assist them to get every single entitlement they are due. Over the years he has identified a few common areas where entitlement applications can be delayed or rejected. One of the main reasons, according to Steven, is the provision of poor supporting documents or ID. To be fair, it is not always clear what a government department expects when it asks for a bank statement, but Steven reminds us that it is not a screen shot nor is it your own spreadsheet of bank transactions. Centrelink requires an actual bank statement, which matches requested dates, usually in a PDF format which can be easily uploaded. 

Possible gain?

Higher Age Pension entitlements paid earlier than expected

2. Apply for concession cards

Those who successfully apply for an Age Pension will automatically be awarded a Pension Concession Card. We’re covered the benefits associated with this card in some detail previously. Suffice to say it is worth about $3000+ per annum in bulk billing, ancillary medical services rebates, pharmaceutical discounts, energy and transport discounts and many other benefits. Older Australians who are not currently eligible for an Age Pension are highly likely to be eligible for a Commonwealth Seniors Health Card (CSHC). This can be used in most of the ways that a Pension Concession Card is used. The good news is that the CSHC is based upon (generous) income limits, with no assets test thresholds. The CSHC has had a fairly low uptake to date, but that is probably because many older Australians are still not aware of its existence. 

Possible gain?

Between $3000-$3500 if concession card is awarded.

3. Review your mortgage options

With one in five households now entering retirement with a mortgage, and interest rates at levels five times higher than they were two years ago, it’s important that you fully consider the net costs of holding a mortgage. And the net gains if this was to be paid off. When many retirees reach Preservation Age they gain access to a significant sum of money that could help reduce their mortgage and save interest. But it’s not a simple Yes/No decision. 

As with so many aspects of retirement income there are trade-offs. Using the lion’s share of your super to reduce mortgage debt may make you feel better, but it could also significantly reduce funds available for income streams which could supplement Age Pension benefits. There is always a ‘sweet spot’ whereby you might reduce a mortgage to manageable levels whilst maintaining future retirement funding needs.  If age 60 is your Preservation Age, and therefore a ‘crunch time’ for your decision making, it may help to model the different options available to reduce your mortgage in an adviser-guided consultation.

Possible gain?

This depends entirely on individual circumstances, but interest cost savings from using some super to pay a mortgage, combined with related lower asset levels can result in an increase in Age Pension entitlements. 

4. Make better use of super rules

There are many useful incentives to invest more money in super. We have covered those relevant to retirees over the past few years. The trick is to keep up to date on what is available to you, at your current age. As well as what is around the corner. It’s critical that you know the relevant rules and whether putting money into super is still the best use of your savings. This becomes even more important if you are likely to make gains from a property sale. As we reported last week, there is still a high proportion of retirees over 65 who have money in super in accumulation accounts. If a small portion of this money was being drawn down in a retirement income stream, they would no longer be paying 15% tax on the earnings on this super. 

Possible gain?

Again, this varies from person to person, but here’s how one couple restructured after better understanding super rules and gained a benefit of $20,000 per year.

5. Regularly review your investment mix

Not everyone has an appetite to invest in the sharemarket. Some people feel much more comfortable with cash. Still others believe that property investment is the best strategy. This is an entirely personal choice. But having the right investment mix makes a lot of sense as different asset classes will have different returns at different times. Holding some cash or liquid assets also makes sense in case of medical or family emergencies. It’s the overall mix that matters most.

Another common error many retirees can make is the automatic assumption that their super should be invested defensively or ultra-conservatively from day one of retirement. This can be erroneous thinking because they typically will have 20-30 years of retirement left to fund and very conservative returns may actually see an erosion of their savings if inflation is higher than their rate of return as has been the case in recent years. 

Possible gain?

As an example, a change of settings from balanced conservative to high growth, over a 5-year period, would have delivered a 2.59% increase in earnings, based upon one large super fund’s performance.   

In short – keep your eye on the ball

The above examples are indicative of the need to keep engaged with your savings even though you may now be fully retired. Active money management can potentially increase your savings and thus your retirement income across the years. And higher income isn’t about your savings – it’s the ability to seize the day and enjoy your retirement years as fully as possible. It’s your pay packet!

There are many strategies available to retirees who remain up-to-date with the rules and options. If you would like support in any of the following areas our experienced advisers are keen to assist:

Retirement Forecasting (Compare two scenarios of how your assets and income will look during your retirement journey). 
Understanding more about super (Assess the options to help make your super work better for you).
Maximising your entitlements (Assess any changes you might be able to make to maximise your Centrelink entitlements)
Understand impacts of your home mortgage (Review the benefits of repaying or maintaining your mortgage in retirement)
Understanding Investing How can you invest your savings to achieve your retirement goals?