Retirement ‘sweet spot’ under threat as government targets economic reforms

Investors chasing the optimum blend of super savings and government pension access may be heading for a nasty surprise in the months ahead.

The retirement income ‘sweet spot’ is under threat. Picture: iStock

Inside the advice sector, they call it “the sweet spot”. It’s the perfect amount of money to have in super that also guarantees you access to a government pension. The win-win.

With the majority of Australians accessing full or part-time pensions, it’s a big game and the rules have been clear for a long time.

But pension access rules may soon be overhauled as the government probes taxes this month, along with other productivity reforms at what Treasurer Jim Chalmers is now calling an economic reform roundtable.

There are rumours the amount of money you can have outside your family home and still qualify for the pension could be cut by up to $100,000.

Centaur Financial Services’ Hugh Robertson told The Australian’s The Money Puzzle podcast that “the sweet spot is in the region of $600,000 to $800,000, where a couple can have super and get a pension”.

Mr Robertson makes the point that some investors will be caught on the wrong side of the line, where they have just enough savings in super to ensure they are not entitled to a pension.

In fact, Mr Robertson points out that a couple with less in super savings, through blending their super savings with pension access, can have a higher ongoing income than a couple which has saved much more in super.

Crucially, the current system is heavily in favour of the homeowner.

There are different limits for homeowners and non-homeowners, but those who own their homes win handsomely because the value of the family home is excluded in pension access calculations.

As any good adviser will tell you, it’s very hard to beat a constant stream of guaranteed income, which is what the aged pension offers. In fact, it’s a government guaranteed income stream that gets indexed for inflation twice a year.

On Mr Robertson’s numbers a homeowning couple getting a full pension of around $45,000 a year would need to have $1m invested in the market to achieve the same annual income.

No wonder pension access is in the spotlight.

It has already been reported that advisers to Social Services Minister Tanya Plibersek have recommended the pension access rules be revised to eliminate investors from exploiting current arrangements.

Among the economic modelling done for the department is a reduction on the pension asset test by around $100,000, a move that would cut thousands of older Australians out of the aged care pension stream.

“We are seeing more retirees and less workers, something has to change,” Mr Robertson told The Money Puzzle.

Weighing against the current tax system is a clear bias against younger workers on full-time salaries who are a decreasing portion of the overall population.

Inside the super system the bias against younger Australians is particularly acute. For example, the amount that can be held in super tax-free by a retiree recently increased from $1.9m to $2m.

However, the amount that can be contributed by a worker in the accumulation phase each year on a concessional basis remains unchanged at $30,000.

With submissions from stakeholders still being lodged with the government for the economic reform roundtable, which kicks off on August 19, the other dimension of the pension system likely to face a review is the deeming rate. It is the assumed rate of return on investments that is used for calculating pension assets.

The deeming rate is meant to be kept in line with official RBA rates but it has not been changed since 2021, when rates were rock bottom.

Earlier this year the rate was frozen yet again by then social services minister Amanda Rishworth.