The retirement sweet spot: When less in super can be more

It might seem like a no-brainer that the more we have in super, the higher our income in retirement will be. But that’s not always the case.

Australians are regularly reminded of the need to grow retirement savings. Yet it can be hard to know exactly how much we need.

The Organisation for Economic Co-operation and Development recommends having sufficient savings to generate retirement income equal to 70% of your final working salary. Industry body the Association of Superannuation Funds of Australia (ASFA) states that singles need $545,000 in super to fund a comfortable retirement, while couples need $640,000.

It’s a good incentive to tuck more into super. The catch is this can mean earning less – not more – in retirement income.

The role of the age pension

Close to four million Australians are retirees. More than half (53%) rely on the age pension to some degree. And while that figure is declining as our superannuation system matures, less than one in three retirees say super is their main form of income.

This highlights the important role the age pension continues to play. To qualify for the pension, retirees need to pass both an assets test and income test. Super is included in the assets test. The table shows the thresholds to receive a full or part pension as at 1 July, 2021.

Age pension assets test thresholds

               Homeowners            Non-homeowners (renters)
Lower threshold Upper threshold Lower threshold Upper threshold
Singles $270,500 $588,250 $487,000 $804,750
Couples (combined) $405,000 $884,000 $621,500 $1,100,500

Source: Services Australia

What is the taper-rate trap?

The degree to which fortnightly pension payments reduce when assets sit between the lower and upper thresholds is determined by the ‘taper’ rate. And it’s this rate that has the potential to work against people with large super balances.

On 1 January, 2017, the government doubled the taper rate to $3. So, for every $1,000 of assets above the lower threshold, retirees now lose $3 from their fortnightly pension or $78 a year.

The upshot is that retirees need to earn a return of 7.8% annually on those assets that exceed the lower threshold to compensate for lost pension payments. That’s a big return, especially when it would need to be earned year after year. For the record, 5.27% (excluding dividends) and 9.83% (including dividends) over the 10 years to July 30, 2021.

Not surprisingly, advocacy group National Seniors Australia (NSA) argues the $3 taper rate is penalising some retirees for having more in savings. That’s because their assets are simply not able to earn as much as the retiree has lost in age pension payments.

In fact, NSA estimated that a homeowning couple with $400,000 in assets would earn income of about $55,000 annually with the current taper rate, whereas a couple with $800,000 in assets would earn just $42,000.


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What is the retirement sweet spot?

The question is, what’s the super sweet spot that lets retirees maximise income from both super and age pension payments? Analysis by BetaShares found retirees can be caught in the taper-rate trap if they have savings between about $350,000 and $600,000, depending on how assets are invested.

Ian Henschke is spokesperson for the Alliance for a Fairer Retirement System and chief advocate for NSA, which also crunched the numbers around the taper trap. “The sweet spot is around $400,000 in savings, which can see a pensioner (home-owning) couple earning $1,000 a month more than a couple with $800,000 in savings,” he said.

Mr Henschke added that the age pension hasn’t taken a serious uptick since 2009, and as the pension rises by what he describes as an “infinitesimal amount” each year (pension payments were not adjusted at all in September 2020), current figures are likely to hold for some time.

What to do if you’re caught in the trap

The taper trap is something to be aware of, especially if your super savings are above the lower threshold of the assets test as you head towards retirement. But it shouldn’t deter you from growing super. There are options.

As Mr Henschke explained, for those who are at risk of losing age pension entitlements, it can make sense to spend part of your super upfront to lower the balance and boost pension eligibility. He cited the examples of using super to fund home renovations, which can provide savings in maintenance costs, or even upsizing to a more expensive home to enjoy a better location.

Another alternative is to invest part of your super in a lifetime annuity. Only 60% of the payments from the annuity may be included in the assets test. However, this is something to seek professional advice on, as these annuities can come with restrictive conditions around accessing your money.

Know how your retirement income could shape up

Fortunately, it’s possible to get an advance idea of how much retirement income you will have – and whether you’re safely in the super sweet spot or about to overshoot it.

Canstar’s Superannuation & Retirement Planner calculator shows your likely annual income in retirement, including how much will come from super and how much the age pension will contribute. It’s worth a look. You can play around with the figures to see how a change in super savings can affect your retirement income.

Qualifying for the age pension may only get harder

The fine print to all this is that our ageing population makes it likely it’ll become harder to qualify for the age pension in the future. The further you are from retirement, the greater the chance the rules around accessing the pension will change before your working life ends.

It’s not just about an ageing population, though. In his Budget speech for 2021/22, Treasurer Josh Frydenberg pointed out that Australia is looking at a deficit of $161 billion this year. Net debt will peak at $980.6 billion, or 40.9% of GDP, by June 2025.

These figures may be low by international standards. But as the government looks at ways to trim the deficit and public debt, it’s a reasonable assumption that claiming the age pension will become tougher in the years ahead. This highlights the need to embrace your super and any opportunities to add to it during your working life.

Remember, no matter what your age, your fund can be a source of low-cost financial advice to help you find the super sweet spot.

If you’re unsure how the taper rate could affect your pension entitlements, a free financial information service is available through Services Australia. Call 132 300 for details.


Cover image source: vectorfusionart/

Nicola Field is a personal finance writer with nearly two decades of industry experience. A former chartered accountant with a Master of Education degree, Nicola has contributed to several popular magazines including the Australian Women’s Weekly, Money and Real Living. She has authored several best-selling family-focused finance books including Baby or Bust (Wiley) and Investing in Your Child’s Future (Wiley).


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