Stay on top of this, and you won’t run out of retirement savings

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One of the most surprising things about Australia’s age pension is that four out of five of us end up receiving one, a statistic that can come as a shock to self-funded retirees who often assume if they start retirement by living off their savings and superannuation, that’s how they’ll end it.

But this is not the case. It’s highly likely that many who assume they’ll never qualify will never bother to apply, and end up missing out.

Knowing that a pension is almost inevitable before you enter retirement is enormously helpful when it comes to planning your long-term retirement income needs.Credit: Dominic Lorrimer

Australia currently has just over four million people aged 67 or older. Of these, nearly 70 per cent will start their retirement on a full or part pension. The remaining 30 per cent will start their retirements by funding themselves through a mix of superannuation, savings, investments and other income sources.

But these proportions shift dramatically between ages 67 and 85. By their mid-80s, many retirees will have moved from a part pension to a full one. And others who were previously ineligible will now qualify.

Knowing that a pension is almost inevitable before you enter retirement is enormously helpful when it comes to planning your long-term retirement income needs.

The biggest question about retirement income is usually “how much is enough?”. Understanding the probable role of at least a part pension entitlement gives you reassurance that you are unlikely to ever run out of money.

Staying informed is the best strategy to ensure you get your full entitlements as soon as they are due.

A full age pension (including supplements) pays $28,514 for singles and $42,988 for couples (combined). About half of recipients are on these full amounts. The other half are on a part pension which could be as little as $1 per fortnight. This pension combines with other income streams to form a retirement salary.

Whilst the term pensioner can have some negative connotations, it shouldn’t. It’s a legitimate benefit provided as a safety net to older Australians who have worked and paid taxes throughout their lives. Some pensioners have little in the way of assets, others have fully owned family homes and financial assets up to $667,500 for singles and $1.03 million for couples.

Of all income streams, the age pension is the most dependable. It’s one of the few that is inflation-protected as it’s reviewed twice a year against three different benchmarks (inflation, wages, retiree spending) and adjusted accordingly. It is also government guaranteed: markets can rise and fall, inflation can soar, our currency can wane, but the pension will be paid, regardless.

Anticipate your eligibility

Those who start retirement by living on their superannuation will most often reduce their super balance sufficiently to fall below the assets limit sometime over the next 10 to 20 years. At this point (assuming their income is also below the limit), these retirees will become eligible. It’s important to know this, as the pension is not back paid to when you become eligible – you have to apply for it.

A recent poll indicated 40 per cent of those who are eligible apply for this important entitlement later than necessary, thus forgoing this extra income. There are many free calculators available to check your status quickly and easily.

Apart from ensuring you apply as soon as you can, there are other important reasons why you will need to factor in probable pension entitlement at the outset of your retirement. You can easily do yourself out of entitlements by unknowingly getting the rules wrong.

This means you need to either stay up to date with the relevant rules yourself or know a trusted someone who does.

Centrelink has many rules, terms and conditions, but there are some top-level ones you need to know. These include the reporting of superannuation, gifting limits and how couples can structure their super. Many pension applicants are rejected because they double report superannuation (as both an asset and a retirement income stream).

Others think that giving away assets could reduce their reportable totals and bring them in under the threshold, but when gifting rules are applied, they remain ineligible. Still others miss out as they didn’t know a transfer to a younger spouse whose super is in accumulation mode would have reduced their assets to below the limit.

Put simply, staying informed is the best strategy to ensure you get your full entitlements as soon as they are due.

• 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 any financial decisions.

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