The sweet spot: How to get the most from your super and the pension

This week, the government’s twice-yearly increase to age pension rates kicked in, giving us a good reason to pause and reconsider how we balance our sources of retirement income. Turns out, there’s a new sweet spot – the point where super earnings and the pension intersect to help you attain maximum earning capacity in retirement.

On 20 September 2024, the full pension rose to $1,144.40 per fortnight (about $29,754 per year) for single retirees, and $1,725.20 per fortnight (around $44,855 per year) for couples, combined.

The assets test caps have also increased, with the full pension now available to single homeowners with assets under $314,000 (excluding the family home), and $470,000 for home-owning couples. For non-homeowners, the limits rise to $566,000 for singles and $722,000 for couples.

There’s a point where super earnings and the pension intersect to help you attain maximum earning capacity in retirement.Credit: Simon Letch

The pension is a key part of many Australians’ retirement income—around 40 per cent rely on the full pension as their primary source of income, and another 24 per cent receive a part pension. It’s nothing to be ashamed of. It’s a solid and dependable income stream, and when combined strategically with your superannuation, it can set you up for a comfortable retirement.

There are two main things I like people to understand in pre-retirement planning when it comes to the pension – how to shift from one working income to layering your income streams, and how to find that sweet spot.

The latter is about finding the right balance where your super and pension work together to maximise your income in retirement. Most people don’t realise that super is designed to be combined with the age pension, and they work together brilliantly.

There’s a point where you achieve the maximum level of the age pension, without it being tapered, and you use those assets to generate a healthy income which you draw down as a ‘layer’ too - usually though an account-based pension.

The sweet spot technically is the point where the assets test limits and the income test limits kick in to taper your pension. This is where you can trigger the largest amount of age pension, without tapering; and combine it with income that those assets can earn.

I wish more people understood it because the income generated from layering superannuation, the age pension, and working can form a quite reasonable income as long as you’re not living the high life.

It’s worth pointing out that there’s a bit of an anomaly in the two tests currently, as couples have it a little better off than single people. For couples, if you have the maximum amount of assets allowed for a full age pension or $470,000 you won’t trigger the income test as your ‘deemed income’ is still below the income test free area.

Understanding the sweet spot can be tricky – but it’s something that should give people with a smaller super balance greater confidence.

But for single people, the caps are currently not as fairly distributed. You can only have $301,000 in assets, despite the aged pension assets test cap sitting at $314,000. If you have more than $301,000 you’ll have a deemed income of more than $212, the single income free area for the income test, and your pension will be tapered at 50 cents for every dollar over the caps.

Let’s look at some case studies.

Tom and Maria, both one year into retirement, have a super balance of $470,000, and they have drawn 6 per cent or $28,200 per year as an income stream. They combine this with the full age pension of $44,855 to achieve a comfortable income of $73,055.

Their super fund earned 8.5 per cent in balanced and growth investments last year, so they haven’t gone backwards, in fact, their super balance is now a little above their starting balance of $470,000, at $481,750.

Why does this work? Their assets sit right at the cutoff point for the full age pension, and they don’t trigger the income test because the deeming rate is used to calculate income on financial assets. Their deemed income is $326.88 per fortnight on $470,000 and the income test free area for couples is $372.

They’re planning a trip to see their daughter in Singapore this year and will draw the $11,750 in excess earnings they hold in super as a lump sum to pay for it. They want to try and keep their super balance at or around the assets test caps because every $1000 they have in assets over $470,000 takes $3 off their fortnightly pension.

Not only that, but they’ve both kept tinkering with work too, knowing they can earn $7,800 per person without impacting their age pension – this helps them top up their holidays.

A self funded retired couple with $1.3 million in income generating assets would need to draw a 5.5-6 per cent income stream from their superannuation to be able to match this level of income.

Similarly, Priya is 68 and single and drawing 6 per cent income stream from her super balance of $314,000, the cut-off point for the age pension. This gives her a superannuation income stream of $18,840. She combines this with a full age pension of $29,754.40 to form a layered retirement income of $48,954.

With $7,800 from working, this gets her close to the Association of Superannuation Funds Australia (ASFA) comfortable retirement benchmark of $52,085.

Similarly, her superannuation fund returned her 8.5 per cent last year, and she wants to manage the tapering of her age pension, so she’s decided to do a small renovation of her bathroom to make her house more suitable to age in place, spending the $7,850 in additional funds that remain in her super fund. She could consider using it in other ways too, drawing it as a lump sum or an increase to her income stream.

Understanding the sweet spot can be tricky – but it’s something that should give people approaching retirement with a smaller super balance much greater confidence.

Most super funds offer advice on these types of strategies at no extra cost – you’re probably paying for the advice in your annual member fee - so ask!

Bec Wilson is the author of bestseller How to Have an Epic Retirement. She writes a weekly newsletter at epicretirement.net and is the host of the Prime Time podcast.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making financial decisions.

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