Are you at risk of falling into the ‘superannuation trap’?

New research reveals those with middle-ranking super savings get the worst deal.

People with super savings of between $300,000 and $800,000 get the worst deal.

Inside the financial advice sector they’ve been talking about it for years — the super trap, a zone you do not want to be in where you have too much saved to be on the pension but not enough to get the full benefits of being an independent investor.

It has never been easy to pin down the numbers on this issue. But now thanks to a paper for the Actuaries Institute the numbers are clearer: the trap zone is revealed as somewhere between $300,000 and $800,000.

There are two groups that get stuck in this zone. The first is those who have saved just a little more than is required to qualify for a full pension. The second group are already retired and are so worried about how long they might live that they opt for a life of “genteel poverty”.

It’s the old problem of those in the middle getting the worst deal.

The key issue here is the taper rate — a devilishly complex formula that works as a means-tested exclusion rate for pension access. It comes down to the dollar amount of savings that you have accumulated when you retire — the more assets you have, the less you can access a full or part government pension.

In successive federal budgets the taper rate has quietly been moved higher. It is now double what it was in 2017, says Andrew Boal, a member of the Actuaries Institute public policy council and CEO of the Rice Warner group. (Under the pension assets test three years ago, pensions were cut by $39 for every $1000 in assets held above the relevant thresholds. That figure is now $78.)

The “taper trap”, as Boal calls it, cuts in at different levels for different groups, though it specifically affects couples who are homeowners accessing part pensions — and it just so happens that 70 per cent of people at retirement are in couples.

As Boal, the author of Spending in Retirement, puts it: “A part of our super system is that we have a group where the more they save, the worse off they are.”

The crux of the issue is that the taper rate is what economists call “a perverse incentive”.

At its worst, the arrangements mean some people can get more cash in their pocket each week from a full government pension than others who live off the income from a super account built on their own savings.

Of course, it is true that the independent investor with their own savings is in a stronger position and less beholden to government pension policy — they can always get more income if they eat into their capital.

But the system is letting many down. In fact, the failure is confirmed by a small army of advisers who work at guiding people into getting money “out of savings” so they can qualify for a pension.

This year’s market meltdown won’t help, either — many investors who might have been on the cusp of climbing out of the top end of the taper trap will now have slid back into the zone where they are stuck in the middle.

Should you take action?

What to do? The cynical will say jettison any money you have over the taper rate threshold and fall back on the pension — it’s a solution, but hardly a satisfactory outcome for anyone.

Another route might be to push like hell to get your super into that higher zone where you need no longer be measured against even the most optimised access to the government pension, but this involves taking ­bigger risks that will not be appropriate for many older people.

Similarly, older people — already retired — might give up on worrying about how much they are going to cost their families if they live a very long time and if that means an inheritance gets ­diluted, so be it.

As Boal suggests, we have built a very good retirement super system that has put a strong focus on saving for retirement — but once you retire the system can leave you high and dry. It’s time to solve the looming problems of the retired, especially the cohort “in the zone” with $250,000 to $750,000, which currently represents close to 25 per cent of all retirees but is due to swell towards representing half of all retirees in the future.

Boal says there are three interdependent moves that can fix the system.

First, rewind the recent taper rate changes by about a third.

Second, get financial advisers on board to guide people towards achieving prosperous entire retirements rather than trying to duck under the means-tested pension thresholds.

Third, encourage the provision of annuities, especially deferred lifetime annuities where you purchase a product that guarantees you a set income per annum over a certain age until the day you die. (This may well be the most difficult as annuity products are scarce and offer very modest outcomes at present.)

Boal’s research offers a pathway for a system that is not being fair for those in the middle. It also gives us the best picture we have yet on the trap zone that many underestimate — until they find themselves in it.

Wealth editor James Kirby presents Your Portfolio, a series of Facebook live Q&A sessions each Wednesday at 7.30pm.