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Super and the Pension Means Test

Super: "Sweet" and "Sour" - Asset Taper Rates

The Impact of the Asset Test Taper Rate

If you are approaching retirement, you will often be drawn to articles in the popular press and financial magazines headlining the existence of a "sweet spot" when it comes to income in retirement. The precise "sweet spot" will vary over time with increases to the pension and asset test limits but our illustration below uses figures applying as at July, 2023 and we intend to only occasionally update the actual calculation.

The "sweet spot", as at July 1, 2023, is where singles and couples have $301,750 and $451,500 respectively in super and other assessable assets. These individuals are eligible for a full pension and by virtue of the pension assets test they can be earning more than those who have significantly more assets. This is the impact of the taper rate introduced in 2017, which reduces the age pension by $3 a fortnight for every $1,000 above the requisite asset threshold. In arithmetical terms, that means anyone with assets over the threshold are penalised by $78 (26 x $3) for every marginal $1,000 they have an assets - meaning they would need to earn more than 7.8% on these funds simply to "stand still" in terms of the impact on the age pension.

That is why, in the chart below, we illustrate that anyone with assets in excess of the pension threshold levels will earn less total income less than individuals on the threshold level unless 1) their return on assets exceeds 7.8% 2) their level of assets exceeds the higher pension asset threshold (currently $656,500/$986,500 for individuals/couples who are homeowners). In effect, the taper rate means that individuals are typically earning a negative real return on assets in what is often referred to as the "taper trap".

Let's make an admittedly simplistic comparison - compare the situation of Susan, a single individual homeowner aged 68, who in the first situation has $300,000 in assets, and in the second situation $600,000. Her total income is modelled on the assumption that her superannuation makes a return of i) 3% and ii) 8% in the respective financial year. Note that an 8% return basically approximates the long term rate of return for a super balanced fund - historically - and we don't address drawdown rates, which raises even more issues.

Homeowner with $300,000 in Assets

Homeowner with $600,000 in Assets

3% Super Return

Full pension income of $27,664
Plus 3% x $300,000 = $9,000
Total Income = $36,664

8% Super Return

Full pension income of $27,664
Plus 8% x $300,000 = $24,000
Total Income = $51,664

3% Super Return

Partial pension entitlement: $4,400
Plus 3% x $600,000 = $18,000
Total Income = $22,400

8% Super Return

No pension entitlement: $4,400
Plus 8% x $600,000 = $48,000
Total Income = $52,400

(Very) Unintended Consequences?

The apparent reason behind the progressive taper rate was to motivate retirees to spend more of their retirement savings and run down their capital, rather than leaving large balances at the end of their life as (tax-free) inheritances. We can't criticise the government for wanting some return on the very large amounts of money spent on supporting/subsidising superannuation, but we wonder whether they chose an appropriate, effective and fair mechanism.

When you introduce "cliff effects" into public policy you are obviously looking to influence behaviour. However, rather than having individuals begin to support their income through the rundown of capital, or indeed converting the equity in their homes into income through the Home Equity Assistance Scheme (HEAS), it seems that many individuals may have taken the view that any capital over the pension threshold is unnecessary and best dispensed with - by spending on holidays, cars and indeed the family home, which remains not assessable. From one perspective, you earn a guaranteed rate of return of 7.8% by reducing your asset base, and perhaps more if you renovate your home and it produces non taxable future capital gains.

The above approach neglects to consider however that you can be retired an "awfully long time", perhaps more than 30 years, and it is important to husband your capital as much as possible - bearing in mind the possibility of increasing health and aged care costs.

In Summary

The upshot is that this is an area where the government needs to consider whether the policy is regressive; rewarding entirely the wrong behaviour and actually disincentives saving for retirement. There also needs to be a very clear eyed review of how the family home is treated for pension purposes - the fact that is not assessable leads to enormous imbalances in the social security system which are only logical if viewed through a "political" lens and inequitable from an inter-generational standpoint.

A better approach may be to include some part of the value of the family home above a certain level of value in pension assessments, requiring individuals to convert equity into income, rather than in some situations continuing to draw a full age pension while living in homes worth millions of dollars and then passing the value, tax-free, to family as inheritances. This would address some longstanding inequities and reduce or remove the incentive for individuals to further invest in the family home and perhaps fund a fairer and more effective approach to pension eligibility.