Superannuation funds vs Age Pension

More than half of Australians over 65 currently rely solely on the Age Pension. Depending on how old you are when you decide to retire, your income needs to last between 15 to 30 years.

Understanding how the Age Pension works in addition to super can help you better plan for life after retirement when the fortnightly wage income stops. One thing is for sure, the rules around super contributions, accessing super and age pension eligibility ramp up once you hit the 60s and 70s.

Your superannuation balance is considered by Centrelink when calculating your Age Pension, as are other income and assets, which determine full or part pension eligibility.

An eligible single retiree can receive a full pension of $26,500 a year or $513.25 a week.

For a couple in a similar situation, the basic government-age pension plus special supplements are an annual $40,238, or about $774 a week.

The age pension cuts out for a single retiree when super and/or savings reach $622,250. For a couple, the full pension is available for savings of up to $419,000, while the cut-off amount where no pension support is provided is $935,000.

When your super savings exceed $280,000, the age pension reduces by $3 for every $1,000 of assets greater than this. That is $30 for every $10,000 of super or savings and $300 for every $100,000 of super or savings.

This means that where a super balance is $400,000, or $120,000 above $280,000 – the contribution from the age pension will still be $333 a week. For instance, for someone needing $700 a week for a living, their super (or any other savings) will need to contribute $367, or just over half.

An Australian Financial Review columnist recently responded to an inquiry seeking advice on whether to concentrate on building super or staying within the pension income and assets test limits to maximise pension payments.

The columnist’s conclusion was to build super wherever possible. “It’s only when you retire that you are likely to appreciate having extra savings that you draw upon for different reasons,” he wrote. Relying on the Age Pension comes with risks:

• The increasing cost of ageing may be something an older salary earner or even younger retiree may overlook. Being reliant on the public health system at a time when increasing demand and limited funding are impacting the public health system limits choice and preferences for medical support.
• Not having enough funds for a desired level of retirement comfort and spending. Referencing the Association of Superannuation Funds figures, he wrote: “The most recent study late last year calculated that a modest lifestyle could cost a single retiree $30,582 – 15 per cent more than the basic age pension – while a more comfortable lifestyle was costed at $48,266, 80 per cent above the basic age pension.”

There are two types of contributions, depending on your circumstances and whether you are still working.

Concessional contributions include:

• Compulsory contributions - the before-tax contributions your employer contributes to your super fund under the superannuation guarantee.
• Voluntary salary sacrifices contributions - additional contributions you can ask your employer to make into your super fund out of your before-tax income.
• Voluntary tax-deductible contributions - contributions you make (such as when you transfer funds from your bank account into your super) to claim a tax deduction.

Concessional contributions are usually taxed at 15 per cent in your super fund (or 30 per cent if your total income exceeds $250,000), which for most people means they will pay less tax on contributions than on any income earned.

Non-concessional contributions include:

• Voluntary personal contributions are made by transferring funds from your bank account into super, but you cannot claim a tax deduction.
• The last time your super fund can accept any voluntary contribution from you is 28 days after the end of the month you turn 75 unless you are making a downsizer contribution.

If you have total super assets of more than $1.7 million as of 30 June of the previous financial year, you cannot make additional non-concessional contributions to your super, or you may be penalised. There are restrictions on the ability to trigger bring forward rules for certain people with large total superannuation balances (more than $1.48 million as of 30 June of the previous financial year).

Until July last year, if you were aged 67 to 74 and wanted to make a voluntary super contribution, you had to meet a work test or get a work test exemption. Under the new rules, under-75-year-olds can make or receive personal, and salary sacrifice contributions without meeting a work test or needing an exemption.

Those who are eligible, including being aged 60 or over (before 1 January 2023 or aged 55 or over from 1 January 2023 onwards) can make a tax-free non-concessional contribution to their super of up to $300,000 each using the proceeds from the sale of their main residence – regardless of caps and restrictions, such as the work test, that otherwise apply.

Up to $600,000 per couple can be contributed toward super.