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Nothing has highlighted the unintended consequences of tinkering with retirement income more than last month’s federal budget.
The fiscally and politically potent combination of age pensions and superannuation is always complex, however this budget has left many financial analysts scratching their heads.
The proposed changes to the Age Pension eligibility criteria, put forward by Minister for Social Services Scott Morrison, will have major ramifications for retirees who had carefully planned for their financial future.
While the tighter rules are designed to stop wealthy retirees living off the government, it’s likely they could have the perverse effect of encouraging pensioners to blow their savings just so they can continue to receive benefits. The formula just doesn’t add up.
A look at the numbers
Meet John and Jan, who are retired. They own their family home and have $375,000 in superannuation assets. Under the proposed new legislation, they are eligible for the full age pension. Like most retirees they will invest in “safe” investments and expect to make a modest return of around 3% on their super. This return, combined with their pension entitlements should deliver an annual income of nearly $45,000, whilst maintaining their capital. In theory they could choose to supplement this income by drawing down on their super.
Retired couple number 2, William and Sally who also own their family home have worked hard at saving for retirement and have a superannuation balance of just over $800,000. A figure they were told would deliver them the ‘comfortable retirement’ they desired (as defined by the Association of Superannuation Funds of Australia and published on the MoneySmart website). They have spent the last decade actively planning their ‘golden years’ and factored in an annual income of around $60,000.
Like many others William and Sally have been assuming the age pension would complement their income from the outset (roughly $15,000 out of the $60,000) and gradually increase over time to make up a much larger proportion in their latter years. The balance would consist of around $25,000 in super earnings (based on the same 3% earning rate as John and Jan) and an annual drawdown of $20,000 on their super balance.
But on budget night, the government turned William and Sally’s plans on their head. Under the proposed new rules, William and Sally are no longer eligible for any government pension at all. In the proposed new environment the “comfortable” retirement they were promised will now cost a further $15,000, increasing their super drawings to $35,000 per year.
Put in perspective John and Jan (receiving a full pension) could choose to live on a similar income by drawing only $15,000 from their super per year.
It’s estimated that William and Sally would be among 300,000 full or part pensioners set to receive less if the government changes are legislated. According to analysis by Rice Warner, half of all people leaving the workforce within the next decade will be affected. For these middle retirees, the obvious alternative is to spend more assets more quickly in order to qualify for the part or full pension … for a nation facing a ‘budget crisis’ this seems contradictory.
The direction of the overall policy indicates a greater expectation that Australians will plan and provide for more of their own retirement in the future. But unfortunately Mr Morrison’s formula will squeeze middle retirees the most.
There has already been a substantial amount of commentary around the inequality of these changes, a sentiment it would seem Bill Shorten and the Labor party share. On Tuesday Labor attempted to block the proposal only to have the move foiled by the Greens who announced their support, conditional on the Government considering changes to superannuation in its Tax White Paper.
Let’s hope that good sense prevails with an outcome that considers the reality of the numbers, the retrospective impact of the proposal and acknowledges that, for most retirees, income from super and from the pension is totally intertwined.
At it’s core the strategy of the government is not without merit but to introduce the changes retrospectively undermines the integrity of the plans laid out by current and soon to be retirees. If the changes were to be introduced for people retiring after 2025, plans could be amended accordingly.
We will keep you updated but expect this one will continue to be a “watch this space”…