Retirement
Is your nest egg at risk?
Middle-income Australians are being encouraged to spend their retirement nest eggs or lose access to more disposable income from the aged pension, according to new research.
Is your nest egg at risk?
Middle-income Australians are being encouraged to spend their retirement nest eggs or lose access to more disposable income from the aged pension, according to new research.
In a Dialogue paper prepared for the Actuaries Institute, Andrew Boal states that a “taper trap” encourages some retirees to spend their savings quickly, putting them at risk of living on the Age Pension alone.
The taper rate acts to restrict a retiree’s access to Age Pension payments based on the level of their assets through retirement.
The paper highlights that every $1,000 above the threshold leaves a retiree $3 worse off as it is taken from the pension.
This means the “middle” group of retirees with assets between $300,000 and $800,000 could be worse off and have a poorer lifestyle.
Prior to 2017, the taper rate was set at $39. But from 1 January 2017, a retiree’s annual pension was cut by $78 for every $1,000 of assets held above the relevant thresholds.
National seniors Australia has previously stated that under the changed taper rate, a home-owning couple with $400,000 in assets would earn about $55,000, whereas a couple with $800,000 in assets would earn only about $42,000, based on 20 per cent being in savings at a rate of 2 per cent.
The Dialogue paper states that “a higher taper rate does encourage retirees to spend their savings as quickly as possible until they become eligible for the full Age Pension”. It says that few do, but the retirement system as a whole, including perverse outcomes driven by elements of the asset test, needs review.
“Given the interconnectedness of the system, it is important that all the relevant levers are considered in conjunction with each other, including how it impacts on the efficiency and effectiveness of any other changes, such as increasing the superannuation guarantee to 12 per cent,” the paper states.
The paper states that while Australia has one of the best retirement systems in the world for accumulating retirement savings, “we continue to struggle with how to design an efficient retirement spending system”. Part of this is attributable to a lack of clear purpose around what Australia’s retirement system is trying to achieve.
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