Great news from the 2024 Federal Budget! Super will be paid on government-funded Paid Parental Leave (PPL) for mums who have a baby on or after July 1, 2025. This will help close the super gendergap, but comes too late for women currently approaching retirement.
It’s no secret that women typically retire with less super than men. But because women generally outlive men they need more in super, not less.
Regardless of the super gender gap, many Australians – both men and women – worry about not having enough money to retire. It’s a concern shared by half of all baby boomers. However, one of the wonderful things about Australia is the age pension. I’m not about to suggest that the pension lets us live in luxury. But a quirk in the system means a retiree with modest super savings could enjoy a higher income in retirement through a combination of the age pension plus super drawdowns, compared to someone with a larger super balance.
It’s all about the super “sweet spot”, and it arises because of two factors. First, our super is included in both the assets and income tests that shape age-pension entitlements. The second factor is the “taper rate”. This is where retirees lose $3 of fortnightly pension payments for every $1000 of assets they own above the lower asset threshold.
Let’s look at this in practical terms. As the table on the opposite page shows, a single person (homeowner) can have assets, including super, worth up to $301,750 to be eligible for the full-age pension.
If the same retiree owns assets worth $302,750 – just $1000 over the lower threshold – the taper rate will see their pension payments cut by $3 each fortnight, or $78 annually. For retirees who haven’t reached the upper threshold of assets for the age pension, this can see their pension entitlements slashed by thousands of dollars a year.
ETF provider Betashares did the maths, finding that a single retiree with $300,000 in super can earn retirement income of about $43,755 annually ($15,750 from returns on super, plus $28,005 in pension payments), as shown in the table above. Meanwhile, a single retiree with $600,000 in super would receive zero age pension. If they rely solely on income from super, they can expect to earn around $31,519 annually – a difference of over $12,000.
To make up for lost pension payments under the taper test, a retiree’s super savings would need to earn a 7.8% return each year. It’s doable, though there’s a catch.
Data from SuperRatings shows that in the pension phase of super, ‘growth ’-style investment options have notched up returns averaging 8.9% annually over the last 10 years. But gee, this is a high-risk choice for retirees. Annual returns on more conservative, capital-stable options have been closer to 4.9%.
Should I give up growing my super?
The super sweet spot is not a cue to stop growing your super. For starters, the rules around super and the age pension are continually being tweaked. In particular, eligibility for the age pension changes at least annually, so there is no set-in-stone number for your super sweet spot.
Our ageing society also means it’s likely to become harder to access the age pension. So I, for one, won’t be cutting back on growing my super.
Tucking money into super means spending less today. For some families that is a really tough call right now.
Does your super fund pay a retirement bonus?
Retirement bonuses have to be one of the best-kept secrets of our super system. It’s all about super funds handing back part of the cash originally set aside for tax dues when a member transitions into retirement. Around one in three super funds currently pay members a bonus when they move into the pension phase, so be sure to ask if your super fund offers this.
Six simple ways to grow your super:
1. Add to your super, claim on tax
Plenty of us can claim a tax deduction for personal super contributions. It’s a way to save on tax today while growing our super for tomorrow.
2. Consider a spouse’s super contribution
Your other half may be entitled to a tax offset when they make a contribution to your super fund.
3. Get the government to chip in
Low to middle-income earners who add to their super may be eligible for a government co-contribution.
4. Know where all your super is
Over $16 billion worth of lost super is waiting to be claimed. Find out if any belongs to you by phoning the ATO’s Lost Super search line on 13 28 65.
5. Use the Stage 3 tax cuts to grow your super
Most of us have pocketed a tax cut since July 1. The average tax saving is about $36 a week. If you can, use that tax saving to grow your super through salary sacrificing or personal contributions.
6. Shop and get rewards paid into your super
There are a few cashback sites that allow you to direct cashback earned on each purchase into your super fund. So every time you shop, whether you’re getting groceries or buying shoes, your cash rewards go towards boosting your balance.
One final word: Information is correct at the time of writing. From July 1, asset and income test thresholds for pensions increased. For July 1, 2024, thresholds check the Department of Social Services website. If you’re close to retirement it’s also worth calling Centrelink’s free Financial Information Service on 132 300.
This article originally appeared in the August 2024 issue of The Australian Women’s Weekly. Pick up the latest issue from your local newsagent, or subscribe so you never miss an issue.
