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Home / Retirement planning / Retirement planning strategies / The taper trap: Super and the Age Pension means test

The taper trap: Super and the Age Pension means test

Barbara DruryBarbara Drury

Retirement income planning generally revolves around the size of your super balance and whether you will be eligible for a full or part Age Pension. Simple! Except when it’s not.

Your retirement income and spending strategy will be driven by not just your super balance, but also by your savings outside super, your life expectancy and how long your savings need to last.

And given that most Australian retirees still receive a full or part Age Pension, your total retirement income will also be driven by how the Age Pension assets test affects your eligibility for the pension.

The Age Pension and the taper rate

The Age Pension is means tested and uses income and assets tests to determine the level of pension an individual or couple is entitled to receive. The test that provides the lowest amount of Age Pension is the one that is used.

Broadly, it works as follows:

About the author

Barbara Drury
Barbara Drury
Barbara is a financial journalist and author with over 30 years’ experience in Australia and the UK. She is a contributor to The Sydney Morning Herald and The Age Money section, and has worked for the Australian Financial Review and The Australian. Barbara is the author of Alan Kohler’s Eureka Report Guide to Personal Investing, Sorting Out Your Finances for Dummies and Personal Finance for Dummies and co-author of Investing for Dummies with James Kirby.
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Response

  1. Greg Meyers Avatar
    Greg Meyers

    As a CFP I appreciate that in the email containing the link to this article you suggest seeking advice from a qualified financial planner. However, your terminology is perhaps a tad alarmist for anyone with a modest amount of capital in the lead up to retirement and the analysis is perhaps flawed or at least incomplete. Without going into a great amount of detail, but having run many retirement scenario for retiree and pre-retiree clients, it is apparent in almost all cases that they are better off having more capital – even if it lands them in the retirement trap. There are different ways to put a spin on it, but to to keep it as simple as possible consider your first chart titled “Retirement trap in action”. There is an income difference of about $13k for someone with $400k of assets v someone with $800k of assets ($55k and $42k of income respectively). Ignoring any rate of return on capital or other fancy calculations, just having an extra $400k in capital will give you an extra 30+ years worth of $13k (ok, less if you factor in CPI but still a lot of years) just by drawing down the capital over time. That is risk free, no need to achieve 7.8% return to beat the taper rate. To be realistic, that will also take most retirees beyond their life expectancy. There are other benefits to having the extra capital beyond that.

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