The taper trap: Super and the Age Pension means test

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:

• Below set income and assets thresholds, you receive a full Age Pension.
• For each $1.00 per fortnight of income above this threshold, you lose $0.50 in payments per fortnight.
• For each $1,000 in eligible assets above this threshold, you lose $3.00 in Age Pension payments per fortnight. This means a retiree’s annual pension is reduced by $78 (26 x $3) for each $1,000 of assets above the threshold.

The rate at which you begin to lose part of your payment under the assets test is called the asset taper rate.

The current assets test thresholds are set out in the table below, with a full Age Pension applying below the lower thresholds and gradually reducing to zero when the value of your assessable assets is above the upper threshold.

Note: Some assets such as your home are excluded from the assets test. The main items included are your super balance and financial assets held outside super.

	Homeowners		Non-homeowners
	Lower threshold	Upper threshold	Lower threshold	Upper threshold
Singles	$301,750	$674,000	$543,750	$916,000
Couples (combined)	$451,500	$1,012,500	$693,500	$1,254,500

Rates as at 20 March 2024

If a single homeowning retiree has less than $301,750 in assessable assets ($451,000 for couples combined), then they will be entitled to a full Age Pension and their super will supplement their income. The thresholds for non-homeowners are higher to compensate for the cost of rental accommodation.

At the other end of the scale, if a single homeowning retiree has more than $674,000 in super and other assets ($1,012,500 for couples) then they will not be eligible for any Age Pension. Super is likely to be their main source of income in retirement, although some may be eligible for the Age Pension as their super balance decreases over time.

Mind the retirement income gap

As you can see in the tables below, it is the high proportion of retirees in the middle, with assets between around $300,000 and $800,000 for singles and $450,000 and $1.3 million for couples, who are most affected by the assets test taper rate and what is sometimes referred to as the ‘taper trap’.

This ‘trap’ opens up a gap in total retirement income for some part-pensioners compared with people on the full pension.

For single retirees between the ages of 67 and 74 who own their own home, their total income from super and a part-Age Pension can be up to almost $9,000 less (with assets of $700,000) than someone who is eligible for a full Age Pension. For couples the gap can be almost $16,000 for assets of around $1 million.

Single homeowner, 67

Super balance	Minimum super drawdown	Annual Age Pension payment	Total income
$300,000	$15,000	$28,910	$43,910
$400,000	$20,000	$21,360	$41,360
$500,000	$25,000	$13,560	$38,560
$600,000	$30,000	$5,760	$35,760
$700,000	$35,000	$0	$35,000
$800,000	$40,000	$0	$40,000
$900,000	$45,000	$0	$45,000

Source: SuperGuide Age Pension calculator (rates for 20 March – 19 September 2024)

Couple combined, homeowners, both 67

Super balance	Minimum super drawdown	Annual Age Pension Payment	Total income
$450,000	$22,500	$43,753	$66,253
$600,000	$30,000	$32,170	$62,170
$750,000	$37,500	$20,470	$57,970
$900,000	$45,000	$8,770	$53,770
$1,000,000	$50,000	$970	$50,970
$1.3 million	$65,000	$0	$65,000
$1.5 million	$75,000	$0	$75,000

Source: SuperGuide Age Pension calculator (rates for 20 March – 19 September 2024)

How to maximise Age Pension entitlements, but beware

Financial advice columns are full of questions from retirees and pre-retirees wanting to know how to squeeze their assets through the eye of the Age Pension assets test needle.

It’s understandable that retirees are keen to maximise their Age Pension entitlements. For starters, earning even a small part pension will qualify you for the Pension Concession Card and valuable discounts for medical costs, council rates, energy bills and more. But keep in mind that even if you don’t qualify for the pension, you can still apply for the Seniors Card.

One strategy to increase your pension entitlements is to withraw money from super to renovate, buy a campervan or take an overseas trip to qualify for a higher rate of pension. Provided this spending is costed as part of your overall retirement income strategy, it may be money well spent.

More problematic is the temptation to give a big lump sum to children or grandchildren for a house deposit or other financial needs. For one thing, Centrelink’s gifting rules restrict the amount you can give away before you lose potential Age Pension entitlements. More importantly, you may be depriving yourself of funds you need down the track for aged care, major home modifications or other large, unexpected costs.

Another strategy to maximise the Age Pension is to purchase an annuity or some form of guaranteed lifetime income product with a portion of your retirement assets.

As the label says, these products pay a guaranteed income for life. Not only do they reduce the worry that your income may run out before you die, leaving only the Age Pension as a safety net, but they can also increase your Age Pension entitlement.

With longevity protection in place, retirees may also be more confident about spending more of their savings during retirement.

Consider increasing your retirement spending, safely

It’s worth remembering that the minimum super pension withdrawals are just that, minimums. At just 5% for retirees aged 65 to 74, the minimum rate is quite low. Minimum rates increase with age to a maximum of 14% for retirees aged 95 or older.

This, and the fact that super pension fund earnings are tax free in retirement phase, mean it’s possible for your super balance to grow even as you withdraw income, which is also tax free.

According to Chant West, the median pension growth fund (61–80% growth assets) where most retirees are invested, averaged an annual return of 8.6% over the 15 years to December 2023. That means retirees who withdrew the minimum 5% were still able to grow their super pension balance.

To recoup the $78 per year in Age Pension lost for each $1,000 in assets above the lower threshold, a retiree caught in the taper trap would need to earn more than 7.8% on their assets to break even in terms of the impact on the Age Pension. While a 7.8% return may be difficult some years, depending on the state of investment markets, history suggests it is potentially achievable over the long term.

Focus on the big picture

When you’re planning your retirement income, it’s important to consider the big picture. Depending on when you retire and how long you live, you could easily need to plan for 30 years or more in retirement.

Any knee-jerk reactions early in retirement simply to access the Age Pension could backfire later. While it can be tempting to think you will be worse off by accumulating more savings thanks to the taper rate, less is not more when you consider your total income over the duration of your retirement.

While you may receive a low or no Age Pension initially, by having more assets you’re always better off in the long run. You may begin as a fully self-funded retiree, but as you draw down retirement income and the value of your super and other assets decreases over time, you may be eligible for a full or part-Age pension down the track.

The increase in minimum pension withdrawal rates as you age also adds to your total retirement income.

For example, the minimum annual withdrawal rate for a retiree aged 80 to 85 is 7%. A single retiree, aged 80, with a super balance of $700,000 would be required to withdraw at least $49,000 per year. This is significantly more than the full Age Pension of $28,910 which remains the same regardless of your age.

A couple, both aged 80, with a combined super balance of $1 million would be required to withdraw at least $70,000 per year. This is also way more than the full Age Pension for couples of $43,753.