Superannuation’s valley of death needs good advice to get through

When your superannuation balance gets big, trouble can start and potentially kill off some wealth and pension benefits. Here’s how.

Superannuation is Australians’ best way to save money for retirement and save tax at the same time, but there remain some traps that can kill part of your finances.

Take, for example, what could be described as super’s valley of death. It spans about $400,000 and is the danger zone where having your super balance hit a certain level becomes financially pointless.

The valley opens at around $800,000 for a couple, and it can reduce age pension payments more than the extra money’s investment returns are likely to deliver.

Financial strategist Theo Marinis calls it “super’s dirty little secret”.

“The sad reality is there is very little benefit in retiring with a balance between $800,000 and $1.2 million,” he says.

Many people may think they will never have a nest egg that large, but we are talking about couples when looking at these numbers, and as compulsory superannuation heads towards 12 per cent of wages it will become more common to see individuals with $400,000 balances.

Centrelink’s age pension assets test starts reducing payments when a homeowner couple has $451,500 of assets excluding their family home, which is exempt from means testing.

Growing super balances are good, but some traps lurk and advice is helpful. Picture: iStock

That same couple can hold assets totalling $1.03m before age pension payments – and associated concessions – cut out completely.

Marinis says a couple with $1.5m will not significantly benefit from the pension system until their own money runs down to about $800,000, while a combined nest egg above $2m means they are unlikely to ever require a pension.

Figures from the Association of Superannuation Funds of Australia show average super balances for 60-64 year olds were $403,000 for men and $318,000 for women as of mid-2021.

A majority of people retire receiving age pension payments, often a part pension these days thanks to compulsory super existing since the early 1990s.

Despite the wackiness of the pension and super rules making things tricky for people with just over $800,000, there are plenty of strategies that can help savers and seniors navigate the system successfully.

Strategy number one is to build a bigger balance if you have enough years ahead of retirement. Salary sacrifice and other tax-deductible contributions, after-tax contributions, co-contributions, spouse contributions and downsizer contributions are among the incentives to help people build a big nest egg faster.

People can also turn some of their nest egg into exempt money by injecting it into their own home via renovations or buying a more expensive property, but there are hefty buying and selling costs so everything would have to be weighed up.

A legitimate strategy could be to feed your travel bug early in retirement, as money spent on those memorable life experiences will no longer be assessed by Centrelink.

Also, where one member of an older couple is significantly younger than the other and below the pension age of 67, extra money can be put into the younger partner’s super fund where it won’t be counted by Centrelink until they reach 67.

The complexity of our system means good financial planners are worth their weight in gold, as they can often save people tens of thousands of dollars simply by recommending tax-effective superannuation strategies.

Super’s valley of death lurks on the horizon for many, but the way that Australians approach and navigate it can result on only a small amount of money being killed off by crazy super, tax and pension rules.

Originally published as Superannuation’s valley of death needs good advice to get through