Higher pension rates – but are you the meat in the sandwich?

A higher pension rate raises the question of whether independently funded super is worth it – but it certainly means you should try to get pension access.

The one thing we can say for sure is that if you can get any ­access to the pension – even the ­tiniest amount – it opens the gateway to recurring financial benefits. Above, Treasurer Josh Frydenberg with Treasury secretary Steven Kennedy five days before the budget. Picture: NCA NewsWire / Gary Ramage

Next week’s federal budget will definitely offer some pre-election handouts, but for investors it is ­unlikely any item will be more ­important than this week’s lift in the pension rate. Put simply, the ­increase changes the variables around how you might invest for retirement.

For some, it will affect the amount they put into super years before they retire. For others, it may even change whether they should bother at all to finance their own retirement.

This is the “unadvised” layer of investing. It’s where millions of Australians seek to make the best of the interplay between current age pension payments and what they might have saved privately.

Most financial planners could not be bothered discussing investment at these levels – keep in mind that financial advice costs at least $3000 a year.

At the same time, much vaunted robo advice services are equally unlikely to help anyone operating in this segment of the market.

What is this segment? Well, it just widened because the “cap” or assets test cut-off for accessing the pension has just lifted to $901,500, from $891,500, for a homeowning couple. (All the other pension rates also lifted by an equivalent amount.)

In other words, if your combined assets can stay under that increased cap you can get some access to the pension system. Even if that access is limited, you still get the discounts on transport, energy bills and, crucially, the Pharmaceuticals Benefits Scheme. If you can get these items at a reduced rate, it would be foolish not to try.

Advisers who take the time to even examine this junction between living off the pension and living off privately funded super will tell you there is both a “sweet” spot and “sour” spot in the system.

The sweet spot is where you get absolutely everything on offer from the government pension system and you still have the maximum in private super savings – this would be very close to $400,000 in super.

The sour spot is where you have super savings that are significant – but not so high that you can live the life of a wealthy retiree: That figure just inched up by $10,000 to a starting point of $901,501.

Obviously, there is a range of outcomes here, but it does suggest that the investors in the middle tier of super – those who don’t have enough to make a good income in retirement and also don’t get any access to the pension – are the meat in the sandwich.

Of course, we must allow for the fact that a self-funded retiree will always own their principal – they control the core funding that can be a legacy for their family in the future. Nonetheless, if – as a single retiree – you are not making a lot more than $25,000 a year from a no-pension super income ($25,677 is the income now when you take in supplements), it would be entirely reasonable to wonder if it is worth the stress and effort, especially for retirees in advanced old age.

For couples the equivalent figure is $38,709.

Let’s put that another way: ­ imagine as a couple you wished to make $38,708 in super each year – the numbers are elastic to some degree. And let’s say the underlying principal was invested conservatively with little risk.

Again, we might presume (based on recent tax office returns for self-managed super funds) that a substantial amount is in bank deposits paying close to zero and a substantial amount in conservative stocks paying a total return of 7 per cent a year. Then a 50-50 portfolio might make 3.5 per cent a year. On $1m at 3.5 per cent, that’s the grand total of $35,000.

In this scenario, the couple needs $1m to try to match the same annual income of another couple on a full pension. If the self-funded couple wants to do better than that, more risk would have to be taken on inside the investment portfolio.

It is perfectly understandable why some people might strategically try to keep under the “caps” for accessing the pension.

But conservatively positioned, self-financed retirees who do not have access to the pension and do not wish to risk the stress of being exposed to the rollercoaster of the investment market are the losers here.

With the new pension enhanced rates (which though modest, are the largest increases since 2013), there is now a clear sweet spot where you can get the optimum outcome from the interplay between investing and pensions. That is keeping $405,000 in private assets, but no more than that. Under this arrangement, the full pension and its related benefits can be exploited.

Technically, the point at which a case can be mounted that it may not be worth the effort to self fund can be as high as the new cut-off rate of $901,501. But being realistic – and assuming the investment market will be kind – the true figure relates to your age. Keep in mind pension payments are ­tapered – they reduce the more money you have saved.

If you have $500,000 and you are 10 years from retirement, that savings amount should grow to a comfortable level. If you are 64 with $600,000 it is not going to cross the $901,500 so you will get some pension access.

But would it have been better from an annual income perspective to have saved so much that you deny yourself a recently improved full pension?

One last thing: older investors may be hoping that as rates rise they can return to the good old days when they could put super savings in bank deposits and get a risk-free return of 6 per cent.

Though saving deposits rates may rise soon, there are plenty of arguments that they will not rise as fast as many expect.

What’s more, the banks will leave any lift in savings account rates until the very end of the rate cycle. They have more than enough in deposit account funds just now to do so for a long time.

Remember, the RBA rate remains 0.1 per cent. If you can get a savings rate close to 1 per cent you are doing well. ANZ just cut its key savings rate to 0.15 per cent.

The one thing we can say for sure is that if you can get any ­access to the pension – even the ­tiniest amount – it opens the gateway to recurring financial benefits. And they are worth their weight in gold.