If you’re heading joyfully into retirement, you’ll want to make the most of those super savings you’ve squirreled away during your working life. Remember, you’re entitled to this money and deserve to receive your maximum benefit. Here are some of the money mistakes Australians make as they start planning for life after full-time work, and how to avoid them.
Planning your retirement finances can get tricky so it’s always sensible to talk to a financial adviser to fully understand your options and opportunities.
1. Leaving money in super when you retire
Many people leave their super where it is once they reach age 60 and retire. Unfortunately, this could leave them paying more tax than they otherwise might. The more super you lose to tax, the less you’ll have to finance your retirement.
By leaving their super where it is, many Australians could be inadvertently sacrificing a better retirement lifestyle.
What you can do
If you’re over 60 and qualify to access your super, you can convert your super savings to a pension and the earnings will be tax free. In comparison, investment earnings on super are taxed at 15%. – which could mean a lot less super after 10-20 years.
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2. Not applying for the Age Pension as soon as you’re eligible
The problem
The government Age Pension is designed to help older Australians fund their retirement by supplementing (or in some cases replacing) the money they receive from their super account. Despite that, some people may see it as a last resort – something they should only use if they need extra income on top of their savings. This means they may not have the quality of life they would like in retirement.
What you can do
Applying to receive the Age Pension as soon as you’re eligible may put you in a stronger financial position. To be eligible you need to have reached Age Pension age and pass the income and assets tests.
Age Pension age varies depending on when you were born:
65 years and 6 months
66 years
66 years and 6 months
67 years
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3. Not making the most of your entitlements
The problem
The size of your Age Pension benefits is affected by your broader financial circumstances – specifically, Centrelink’s assessment of your income and assets.
If you’re receiving the Age Pension but haven’t looked at how your other financial arrangements might affect it, you could be leaving money on the table and spending more of your hard-earned super than is necessary.
What you can do
Many Australians can get more out of their Age Pension benefits by making a few simple changes to their finances. For example, if your partner hasn’t reached Age Pension age yet, any money in their name in the accumulation phase of super is exempt under both the income and assets tests. Simply contributing to your partner’s super account can result in big increases in your Age Pension benefits.
You’ll need a good understanding of the income and asset tests so it’s a good idea to speak to a financial adviser before making any changes you’re unsure about.
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4. Assuming you need to stop work completely to qualify for the Age Pension
The problem
While the Age Pension was designed to support Australians in their retirement, you don’t have to be fully retired to receive it. Despite this, many people wrongly believe they’re ineligible because of their employment status. This means they may be missing out on payments they’re actually entitled to, potentially leaving them worse off financially.
What you can do
If you’re approaching Age Pension age (see 2 above) and still working, it’s worth considering applying.
You may be working full time, reducing your working hours, or continuing part-time or casual employment. Depending on how much you earn and your other financial circumstances, you may be eligible to receive a full or part Age Pension.
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5. Not applying for the Commonwealth Seniors Health Card if you’re eligible
The problem
If you’re a young at heart retiree, qualifying for a Commonwealth Seniors Health Card (CSHC) might seem like a rather depressing milestone. But even if ‘senior’ is the last thing you feel like, not having a CSHC means missing out on discounted prescription medicines and other handy benefits.
You may be eligible to receive a CSHC even if you don’t qualify for the Age Pension or for a Pensioner Concession Card.
What you can do
You’ll qualify for a CSHC if:
- you’ve reached Age Pension age (67 if you born after 1 January 1957)
- your income is less than $95,400 a year, or $152,640 combined for a couple.*
The income test for the Commonwealth Seniors Health Card includes your adjusted taxable income and a deemed** amount from account-based income streams.
There are a few other qualifying criteria, but importantly there’s no assets test.
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*As at September 2023
**’Deeming’ assumes money you’ve got invested (e.g. in an account-based pension) generates a particular amount of income
6. Not topping up your super if you downsize your home
The problem
If you’ve finally booted the kids out and are rattling around in a big house, you might be considering downsizing to something smaller.
At the same time, you might be worried about your super balance and fearful that your holidays in retirement might be more caravan park than round the world cruise.
What you can do
If you sell a home you’ve owned for at least 10 years and you’re 55 or over, you can put up to an extra $300,000 (or $600,000 per couple) of the sale money into your super, subject to a few other conditions. This is on top of any other super contribution limits that apply.
However, to take advantage of this you’ll need to plan ahead as you’ll need to make the contribution within 90 days of the settlement date.
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*As at September 2023
**’Deeming’ assumes money you’ve got invested (e.g. in an account-based pension) generates a particular amount of income
7. Not taking enough income from your super pension
The problem
When many people retire and start an account-based pension, they choose to receive the minimum payment amount required each year – perhaps thinking it’s a recommended amount, or because they’re afraid of running out of money.
However, a government review^ found that the majority of Australians don’t make the most of their savings in retirement and die with the bulk of their savings intact. As a result, many people may not end up having the quality of life they wanted in retirement.
What you can do
If you’re thinking about what annual retirement income you’ll need, remember that there are three phases of retirement over which the amount you’ll need to live off will reduce:
- Active lifestyle, healthy, lots of travel and treats
- Slowing down
- Twilight years.
In other words, you’ll generally spend more in the early years of retirement than the later ones.
Remember too that even after you convert your super to an account-based pension or similar income stream, your pot of money is still invested and will keep growing on its own, assuming investment returns are positive.
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^ Treasury, Retirement Income Review – Final report, 20 November 2020, p. 432.
What’s next?
Account-based pensions
Learn how they work, how you can start one, and the benefits of setting one up.
Transition to Retirement
Learn how you can set up an income stream from your super before you completely retire.
Retirement Calculator
Quickly and easily estimate how much super you may have in retirement and how much you may need.
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Things you should know
Information on this webpage is provided by Avanteos Investments Limited ABN 20 096 259 979, AFSL 245531 and Colonial First State Investments Limited ABN 98 002 348 352, AFSL 232468. It may include general advice but does not consider your individual objectives, financial situation, needs or tax circumstances. You can find the target market determinations (TMD) for our financial products at www.cfs.com.au/tmd, which include a description of who a financial product might suit. You should read the Financial Services Guide (FSG) available online for information about our services.
Tax considerations are general and based on present tax laws and may be subject to change. You should seek independent, professional tax advice before making any decision based on this information.
AIL and CFSIL are not registered tax advisers under the Tax Agent Services Act 2009 and you should seek tax advice from a registered tax agent or a registered tax (financial) adviser if you intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise under a tax law.