You are (much) wealthier than you know, thanks to an $897,610 perk
The aged pension means every couple in Australia is already a millionaire – they just don’t know it. Here’s how we worked that out and what it means for you.
It is also one of the few payments with a gender gap that favours women. But before any men plan a “backlash” against this, the discrepancy is only because women, on average, live longer than men.
The benefit is none other than the Centrelink-issued age pension, and it is so woven into the country’s DNA that its true cost – and benefit for men and women – may not be broadly understood.
So we went out to ask the professionals what this annual payment would be worth if it was a lump sum. We couldn’t find that on any government site, so you are welcome, Treasurer Jim Chalmers (or maybe Angus Taylor) – here’s what you need to plug into the budget next year. For everyone else, here’s what the government is really paying
We chose an annuity to compare the pension to because it very closely resembles what a pension actually is – a defined benefit payment. Superannuation also used to offer defined benefits (and it still does in many countries and for a significant number of Australians), but when compulsory super savings were mandated in the 1990s, defined contribution pensions gradually took over.
To replicate the $29,874 a year the pension provides a single person in retirement, an annuity – with no death or withdrawal benefit – would cost a single man $498,270 to buy and a single woman $536,050 as of mid-April, according to modelling provided by Challenger.
The cost of the Challenger annuity is slightly more than the minimum $426,620 for a lifetime pension that a calculator on QSuper’s website – owned by Australian Retirement Trust – says a hypothetical single person would need to generate $29,874 a year. The Actuaries Institute puts the cost at around $500,000.
At that level, the pension is still a bigger component of retirement income than superannuation for most people.
The pension compares with the average 65- to 74-year-old man’s superannuation balance of $435,900 and a woman’s $381,700. So, even after 30-odd years of compulsory super, the pension is still a bigger part of retirement for most than super.
“Australia is one of the only countries to have a means-tested age pension,” says Tim Jenkins, the chairman of the Actuaries Institute’s superannuation and investments committee.
Aged pension ‘millionaires’
“By having the age pension means tested, it’s a way to account for the fact that the more wealthy people get a bigger tax concession through super. Those people will start off often with no age pension but will spend down on their super as they live longer” and eventually qualify for the pension, Jenkins says
To replicate a couple’s payment of $45,037 a year, the most comparable Challenger annuity would cost $897,610. We’ll come back to that number later.
Importantly, that annuity is a slightly better investment than the pension because, should one of the couple die, the surviving partner would still get the full payment every year rather than drop down to the single-person pension rate.
Jenkins says an annuity that mirrored the drop in the rate of pension from a couple to a single payment would cost about $800,000, if one were offered.
When you add in the $60,000 lifetime worth of the Commonwealth Seniors Health Card, it could be argued that government benefits make every single retiring couple in Australia a “couple millionaire”.
And, thanks to concessions on the definition of what counts as income and assets in the pension eligibility rules, many people who start out as self funded when they retire at 67, will be able to fund a much more lavish lifestyle in retirement than they may have thought if they structured their finances to qualify for the pension at a later date.
For example, a couple with $570,000 in super that puts half the balance in an account-based pension and half in a so-called lifetime income product, can achieve a tax-free income of $73,077 a year that will rise with inflation, says Jim Hennington of Optimum Pensions.
That income level will provide a “comfortable” retirement, according to the Association of Superannuation Funds.
“The retirees’ account-based pension balance, supported by income from the age pension and income from their lifetime income product, covers their spending right into their late 90s,” Hennington says.
Lifetime income products provide variable income in the same way as account-based pensions, but they also have some characteristics of annuities and attract similar government concessions.
In the first year, $42,942 a year of our hypothetical couple’s income would come from the aged pension (based on their eligibility, given they have private savings in super), Hennington says.
The balance would come from the lifetime income product ($15,877) and their account-based pension ($14,258).
The calculation assumes an investment return of 6 per cent a year on their super, cost of living increases of 2.75 per cent a year and an increase in pension payment of 2.75 per cent a year.
If they did not use Optimum’s investment-linked annuity, they would need a superannuation balance of $690,000 to achieve that level of income, Hennington says.
“The fact that they receive a higher age pension plus the income from the lifetime product means they don’t need to draw as much per year from the account-based pension as someone who kept all their super in an account-balance option.
“Using the lifetime income product also dramatically reduces risk to the sustainability of their superannuation income,” Hennington says.
Another way to show how powerful the pension is to look at how much money an annuity of the same income value would pay out over time.
Should the 67-year-old couple in the scenarios provided by Challenger live until they were 100, they would receive total payments of more than $2 million. That calculation includes the inflation-boosted cost of the payments, so it is not a direct comparison with the purchase price, but it does illustrate how much $45,037 a year indexed to inflation represents over 33 years.
A single person, using the same methodology, would be paid more than $1.5 million.
Now, back to Challenger’s hypothetical couple with $897,610.
If a couple had that amount of money between them at retirement, the back-up of the pension means they could generate an income of $80,000 a year (rising with inflation) until they were 94, not far off double what they could achieve without the pension. After 94, their income would drop to the level of the pension
If they put part of their super into an annuity, they could keep spending at the higher rate until they were 98. Their post-98 income would also drop to more than $50,000 a year, thanks to that annuity.
So while we can thank Paul Keating, Bob Hawke and John Dawkins for the superannuation system, you might want to thank the architects of the Invalid and Old-Age Pensions Act of 1908 even more.
