Case study: Rebuilding retirement income after losing a partner

In Janet’s case, her assets for Centrelink purposes are that $700,000 in super, $100,000 in cash, and $25,000 of other assets, including her home contents and car. That brings the total to $825,000. Now, you can see when Greg was alive and they were assessed as a homeowning couple, The relevant cut-out point for age pension was $1,074,000 worth of assets. Because they had below that, they were receiving age pension.

Now that Janet is a single, she’ll be assessed under the single homeowner threshold, which is $714,500. Of course, now the $825,000 in assets that she has is above that cut-out point. What that means for Janet is that instead of her total income of $75,000 that she had before Greg passed away, she will lose that age pension component entirely and be left only with the income payments that are coming from those account-based pensions. Thankfully, Greg did nominate her as a reversionary pensioner, so she is able to continue to receive the income from his account-based pension and take over ownership of that in a relatively seamless way. However, she is left with significantly less income than before. Janet wants to know if it’s sustainable for her to continue to live on a total income of $55,500.

So she runs a projection. The outcomes that you can see here are from the QSuper Retirement Calculator. It’s assuming she’s in a moderate investment option with an expected return of 6% per year for her superannuation savings. The dark blue bars are the money that she’ll be drawing from super, and the light blue bars are the age pension. You can see, initially, she’s not receiving any age pension, which is consistent with her assets being too high and above the threshold. But over the years, as her assets decrease, she will start to become eligible for age pension again.

The projection does show that her total income of $55,500 a year is sustainable right up until she’s 99 without running out of superannuation money. However, Janet would like to know if she can target higher income than that, given that before Greg’s death, they were living on a very comfortable amount of money. Running a new projection using the same tool, but with a goal income of $65,000 a year, Janet can see that her superannuation would be expected to run out at around age 89. Now, although that is her life expectancy, 50% of people live longer than their life expectancy, and Janet could very well be one of them.

She’s not incredibly comfortable with the idea that her superannuation will run out at that age. After that, she would then need to live on the age pension alone with no other income, or she could consider using the equity from her home to generate some additional income, but she doesn’t really want to do that. She’s also concerned that if investment returns are not as good or not as consistent as this calculator is modelling, her superannuation could run out even sooner. Janet wants to explore what could happen if she put some of her superannuation into a lifetime pension to ensure that her money can’t run out.

She runs a new projection, a assuming 50% of her money is in a lifetime pension and the other half is still in an account-based pension. You can see the new graph is quite different, with the account-based pension in those dark blue bars now not expected to run out for another six years after Janet turns 89. The reason for that is partly because of the favourable means testing of the lifetime product. Only 60% of the amount that she uses to to buy that product will be assessed as an asset in Centrelink’s means tests.

And that means she’ll get her age pension back immediately. It starts off at quite a low payment rate. If we look at the first year here, you can see it’s expected to be $2,820 in the first year. That means that she doesn’t have to draw that extra amount from her account-based pension because she’s getting it from the age pension instead. It also means that her costs are likely to be lower because she’ll get that very valuable age pension card that’s going to give her access to discounted medicines and doctor’s visits, council rates, car insurance, and so on.

Janet’s also happy to see that even after her account-based pension is expected to have run out, she’ll continue to receive income from her lifetime pension. She won’t be living on the age pension by itself in her later years if she’s lucky to have a very long life. Janet also has some new concerns now that she’s alone. She’s worried about the tax that her children might pay if they inherit money from her superannuation. Originally, she and Greg planned to live a long life together and spend all of their superannuation savings, so they weren’t really thinking about this aspect.

Now that she knows how suddenly life can be taken away, it’s something that’s on her mind. To minimise future tax to the children if she does pass away, Janet chooses to withdraw $360,000 from Greg’s account-based pension. She’ll recontribute that to a brand new superannuation account where it will form a 100% tax-free component because it’s come from an after-tax contribution. She’ll use the entire balance of that account to roll over to her chosen lifetime pension. That may be that QSuper super product that she modelled or a lifetime pension from a different provider.

When her bring forward period ends in three years time, she can make a further withdrawal and another recontribution from her remaining superannuation. That bring forward rule is what allows her to contribute more than the standard contribution cap for non-concessional contributions in one year without without tax consequences. The $360,000 figure that I quoted you is current for the financial year in which we’re recording this. It does change based on the contribution caps that apply in the year that you’re making your contribution, so always be sure to check that limit. Janet also is concerned about her funeral costs now that she’s by herself.

So she chooses to prepay for her future funeral using $10,000 from her cash savings. That means that $10,000 is also no longer counted as an asset in Centrelinks’ asset test, and that further increases her age pension by another $30 a fortnight. You can take a look at our article and video on the Bring forward rule to understand more about how that works. I’d also take a look at the material on the recontribution strategy, including our calculator, that can show you how to minimise tax to adult children and other non-dependent beneficiaries if they inherit money from your superannuation after you pass away.

After following through with her plans, Janet will have three income sources for retirement: her age pension, lifetime pension, and account-based pension. In the first year, she should receive $3,600 from the age pension. That’s a little more than we saw in the projection for her first year, and that’s thanks to that additional $30 a fortnight that she’ll receive because she has prepaid for her funeral. The lifetime pension will pay just under $27,000 in the first year. That’s based on an investment of $360,000 into Q-Super’s lifetime pension. If she chooses a different provider for her lifetime pension, that amount could well be different.

Here we’re not recommending any particular lifetime pension provider. There are quite a few out there, and they all have their benefits and drawbacks. You can have a look at our article on the different providers of lifetime pensions to start doing your own research. Lastly, to top up her income to the $65,000 that she’s targeting, she’ll draw just under $34,500 from her account-based pension. There’s no maximum withdrawal from that product, and that’s well above the minimum of 5% of her account balance that she’s required to take each year.