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Working out how you want to spend your retirement and how you will finance it takes careful thought and planning.
In some ways, this process is easier for couples. A problem shared is a problem halved, as the saying goes. While super accounts can’t be held in joint names, like a bank account, super does provide opportunities for couples to split or share contributions. More on that later.
And if you’re worried about whether your savings will last the distance, two people generally live more cheaply than one.
But as couples know, making decisions about lifestyle choices and money that both parties are comfortable with can be challenging. All the more reason for both parties to be involved in the retirement planning process from the outset.
There are also retirement planning considerations for couples that singles don’t face. Generally, one of you will outlive the other, but there is no way of knowing which of you that will be or how long the surviving spouse will live as a single person. These are difficult issues to think about, let alone talk about, but it’s important you do.
Longevity
In Australia, the average lifespan for a 65-year-old man in 2020 was 85 years and 88 years for women, so working out how long your retirement funds need to last should be a matter of choosing the longer life expectancy of the two of you, right? Unfortunately, it’s not that straightforward.
For example, half of those women are expected to live to age 89 or older and some will celebrate a century.
Jim Hennington, actuary and head of innovation at Optimum Pensions, says couples need to consider that their retirement plan will need to continue as long as either partner stays alive.
“From a probability point of view, this means couples get two changes of living into old age. Even if one partner dies at their life expectancy, there is still a 50% change that the other partner will live beyond their life expectancy.
“A couple’s retirement plan needs to extend a few years beyond the length of the two life expectancies to give the same level of confidence as for each person individually,” he says.
In the graph below, the number of deaths for 1,000 65-year-olds is shown for males, females and the longer living spouse of couples. Singled out on each curve is the age you should plan to that is high enough to cover 75% of people’s lifespans.
As you can see, the age for a couple is the longest – at 98 years compared with 94 for the male and 96 for the female – if you want to be sure your retirement plan will cover you for as long as either person lives.
Source: Optimum Pensions
Yes, it’s complicated
Try our lifetime estimator calculator, which allows you to enter marital status, lifestyle, health and other information which may affect your mortality. You can also select the level of confidence you are willing to accept that your savings will last as long as you do.
Due to wage disparities and time out of the workforce, women generally retire with less super than men.
While couples may plan to pool their income in retirement, equalising your super balances can help you maximise the amount you can hold in tax-free pension accounts after retirement. That’s because there’s a $1.9 million cap on the amount an individual can transfer into retirement phase, or up to $3.8 million per couple.
What’s more, equalising super balances can reduce your liability for the new tax on the earnings of super balances above $3 million, or keep your total super balance (TSB) low enough to use a wider range of contribution options.
You may even qualify for a tax offset or a higher rate of Age Pension.
So, if one partner is likely to have more than $1.9 million in super and the other significantly less, there are various ways they can equal things up to maximise the amount they have in tax-free pension accounts.
Make a spouse contribution. If your spouse’s income is below $37,000 you can make a spouse contribution of up to $3,000 to their super account each year and receive a $540 tax offset. If your spouse’s income exceeds $37,000, the amount of tax offset your receive decreases until it phases out once their income hits $40,000. There is no limit to the amount you can contribute to your spouse’s account provided your contributions are within their non-concessional (after tax) contributions cap.
Split your super contributions. You can transfer up to 85% of your concessional (before tax) contributions every year to your spouse. You can only split the lesser of 85% of your concessional contributions for that year, or the amount of your concessional contributions cap ($27,500 per year in 2023–24 rising to $30,000 on 1 July 2024). Under the carry-forward rule, you may be able to spit larger amounts with your spouse.
Withdraw from your account and recontribute to your spouse’s super. Once you reach your preservation age and retire, or turn 65, you can withdraw some super from your account tax free and recontribute it to your spouse’s account. This counts towards your spouse’s annual non-concessional contributions cap ($110,000 in 2023–24 rising to $120,000 on 1 July 2024). Under the bring-forward rule, you may be able to transfer more. As an added benefit, if you have reached age 67 and your lower-balance spouse is younger, this strategy may help you qualify for the Age Pension.
Consider reversionary pensions
To make things easier for your spouse when you die, and to provide certainty, it’s worth considering a reversionary pension.
If your fund allows it, by nominating your spouse as a reversionary beneficiary they will automatically become entitled to receive your super pension on your death. This has the advantage of keeping your assets in the tax-free super environment.
However, if a reversionary pension would push your spouse over their transfer balance cap of up to $1.9 million, they may need to take steps to reduce their pension account balance.
If for whatever reason you decide against reversionary pensions, a binding death benefit nomination will help ensure your super ends up in the right hands.
Issues for SMSFs
Self-managed super funds (SMSFs) provide opportunities for couples to manage their retirement income and estate planning in a tax-effective manner. But there are also issues couples need to be mindful of.
If you have a husband-and-wife fund, think about the appropriate structure with a view to the future.
If you and your spouse are individual trustees of your fund, when one of you dies, the surviving member will need to appoint a replacement trustee. This process can be time-consuming and fiddly at what will inevitably be an emotional time for the surviving spouse. By comparison, if you have a corporate trustee, it’s possible to continue with a single director/trustee.
You should also consider what professional support is in place if the surviving spouse is less involved in the day-to-day running of the fund.
Now that SMSFs can have up to six members, care must be taken with estate planning to protect the interests of the surviving spouse who may be outnumbered and outvoted by adult children or other fund members.
Divorce and super
Nobody who marries plans to get divorced, but divorce is a fact of life for many Australian couples so you should at least be aware of what it might mean for your super.
Super is regarded as a marital asset which can be divided as part of the divorce process under Australian law. But don’t let the possibility of divorce stop you from employing some of the strategies outlined earlier for maximising your joint super assets. Equalising your super is unlikely to have any adverse impact for either partner in the event of divorce and the overall property settlement.
Providing for blended families
Second and subsequent marriages and blended families are also increasingly common which can add complexity to estate planning, so it’s important to understand your options.
While your super may be one of your major assets, it doesn’t automatically form part of your estate dealt with under your Will. Generally, the beneficiary of your super must be your spouse (including de facto and same sex couples) and/or dependent children, including stepchildren.
To avoid unnecessary conflict and legal disputes after your death, putting a binding death benefit nomination in place can increase the certainty that your super will end up where you intended.
If you have an SMSF, make sure the Trust Deed sets out what is to happen when you die. In some cases, the surviving spouse might benefit from setting up a small APRA fund (SAF), which will distribute your super death benefits to your spouse as a pension for the remainder of their life.
A testamentary trust can also be a useful way to provide for your current partner as well as any children from a previous marriage. A testamentary trust is created by your Will and comes into effect on your death.
Another common estate planning issue for blended families is the family home. Often people want to leave their share of the home to their biological children while allowing their partner to go on living in the home.
If you own the home as joint tenants, it automatically passes to your spouse on your death. However, if you own it as tenants in common, you can leave your share to your children. You could then give your spouse a life interest. This allows your spouse to continue living in the property until they die or move, at which point your children can dispose of it as they wish.
The bottom line
Planning for retirement as a couple has many advantages, with the potential for maximising retirement income, tax efficiencies and estate planning benefits. But there can also be added complexity around planning for two, especially after divorce, remarriage and blended families, but also due to the known unknown of how long each of you will live.
For peace of mind, and to fully take advantage of the options at your disposal, it’s recommended you seek professional advice.
