Would you be better off on the pension?

The Australian’s Wealth Editor James Kirby recently questioned whether it was worth the effort for retirees or soon-to-be retirees on a modest asset level to persist in trying to fund their retirement independently of the pension. 

He said, “the problem patch is where savers have assets between $400,000 and $800,000. Taking an extreme example: If a saver had $800,000 in assets concentrated in very conservative investments—such as low interest cash accounts—then someone on a full government pension may be better off in terms of weekly income. 

“On 2 per cent cash rates, an individual saver with $800,000 would earn $16,000 a year. Yet with that level of assets the saver is likely to be entirely excluded from any government pension.” 

Adelaide-based financial adviser with 30 years’ experience, Brenton Miegel, says there’s no argument that super is worth the struggle. Here’s how he explained it to National Seniors Australia: 

"I wish I had a dollar for every time someone who had saved so much they couldn’t get the aged pension ask how they could rearrange their finances to get one.

"I recently saw an article posing the question: 'Is super worth it?'. To say it got me thinking is an understatement. After all, I work with superannuation-based investment day in and day out! 

"It said a single person with $800,000 would not get the age pension and be worse off than a pensioner for all that saving if they had put it in a safe savings account. 

"On 2 per cent cash rates, an individual saver with $800,000 would earn $16,000 a year.

The article suggested this is the black spot where the saver not on a pension gets $16,000 and the non-saver is rewarded with $26,000 pension." ("Not fair!", I hear you cry.) 

The best performing super funds have returned on average around 8 per cent over the past ten years and poorer performers half that.

A person with $800,000 in a super fund would get $40,000 p.a. on average at the lower end and $64,000 p.a. at the upper end. A lot better than $16,000 at 2 per cent in a cash account! And a lot better than $26,000 on a single person's age pension. 

The Centrelink pension taper rate at 7.8 per cent is not as fair as it should be but the self-funded person who has saved and finds themselves excluded from a full pension, even those sitting just outside the cut off, is always much better off. 

They also usually own their home, which in most capitals is worth from $800,000 to $1.2 million. The ABC recently reported the median price of a house in inner Hobart was $1m! 

National Seniors succeeded in having the Pension Loans Scheme rebranded and more widely promoted to become the Home Equity Access Scheme. Under the scheme, a self-funded couple can now draw down $60,000 a year paid fortnightly at 3.95 per cent without even touching their super or savings. 

One must have sympathy for people who have saved so much they’re excluded from the pension, but the cut off point for a couple is $935,000, so let’s say they have a million dollars and a house probably worth just as much.  

Even if they kept $100,000 at call in a high interest savings account and $300,000 in ANZ Bank shares and $300,000 in BHP they would earn: 

High interest savings account 3.05% 12-month deposit account 4.00% ANZ dividend 5.78% BHP dividend 9.48% Total annual income	$3,050  $12,000 $17,340 $28,440 $60,830

Plus, they get the Commonwealth Seniors Health Card (CSHC) and the concessions that come with it. 

If they got the full pension, they would get $40,237 plus a pensioner concession card.  

The self-funded also don't have to deal with Centrelink and can work as much as they like.  

That’s why financial advisers tell people who are bitter and disappointed about not being on a pension: “Be careful what you wish for.” You are much better off self-funded.  

So, don't spend your savings on a swimming pool or world cruise just to get a tiny pension and a concession card. For example, if you sank $100,000 into the house to get a few dollars a week pension you are foregoing up to $9,480 in BHP dividends, for example, or $4,000 in bank interest to get a few dollars a fortnight and a pension card that only gives a bit more than the CSHC. 

The recent lifting of income thresholds means most self-funded retirees are now eligible for a Commonwealth Seniors Health Card. It’s calculated on income, not assets. State seniors’ cards are not income or assets based.  

In Queensland, according to our National Seniors concessions calculator, pensioners can get $772 worth of concessions. Self-funded retirees with a state seniors’ card and CSHC get $452.

It’s a similar story in other states and territories. You can check out your concessions here.

The balanced option of Australia’s biggest super fund, Australian Super, gave a ten-year average return of 9.32 per cent per annum.  

A single person with $800,000 and no pension would have been getting $74,560 p.a. on average and drawing down say 5 per cent on their super account, giving them another $40,000 for a total of $114,560. Remember that’s tax-free income.

Their drawdown is less than their earnings so they would have more money in their account at the end of an average year then they started with.