The Age Pension age is increasing to 67 which could have a significant impact on the retirement plans of many Australians. Find out if you’re affected and what you can do now to safeguard your financial future.
The age you are eligible to receive age pension payments from the Government, depends on your date of birth. That is, the Age Pension age increases incrementally from age 65½, for those born between 1 July 1952 and 31 December 1953, to age 67 for those born after 1957.
What is your Age Pension age?
|Date of birth between||Age eligible for age pension|
|1 July 1952 and 31 December 1953||65½|
|1 January 1954 and 30 June 1955||66|
|1 July 1955 and 31 December 1956||66½|
|From 1 January 1957||67|
So, if you’re turning 50 this year, ie born in 1968, and you’re planning on retiring at age 60, you will need to use your super and other savings for seven years before you are eligible to apply for the Age Pension.
Why is the Age Pension age increasing?
In 1926 only 5 per cent of the Australian population was over age 65, now approximately 15 per cent of Australians are over age 651. And, with people living longer, the number of years we’re dependent on the Government to support us in retirement is longer.
In other words, our longevity is putting pressure on the Government’s ability to fund a sustainable welfare safety net. But, this age increase could have serious consequences for people’s retirement plans – forcing many who are fit and able, to work longer and save more for retirement.
How much are you likely to need each year in retirement?
The amount needed each year in retirement is different for everyone but the Association of Superannuation Funds of Australia (ASFA) estimates that a comfortable retirement can cost:
- $42,764 pa for a single person
- $60,264 pa for a couple2
And, this estimation doesn’t take into consideration rent or mortgage repayments that you may still need to make.
What if you run out of money before reaching Age Pension age?
If you’re unemployed and below the Age Pension age you can apply for Newstart payments from the Government. However, the Newstart allowance is subject to the Centrelink activity test as well as the income and assets tests.
Your super is an extremely important investment
Your super is an extremely important investment because it’s likely to be your main source of income in retirement especially during the earlier stages. Super is also the most tax-effective way to save for your retirement, so it makes sense to make the most of the tax advantages. Your contributions are taxed at only 15 per cent3 which can be much lower than most peoples’ marginal tax rate which could be up to 47 per cent.
Your employer’s compulsory 9.5 per cent superannuation guarantee contributions are unlikely to be enough to give you a comfortable retirement. But, if you start contributing more to your super now you can enjoy a more comfortable retirement later.
As shown in the above case study, putting an extra 6 per cent of your pre-tax income into your super each year could leave you significantly better off in retirement.
How to contribute more to super
There are several ways you can contribute more to super and take advantage of the tax benefits. Here are two:
1) Salary sacrifice through your employer
Most employers will allow you to nominate an amount to be contributed to super from your pre-tax income. This allows you to pay tax on the contribution as it enters your super fund at just 15 per cent3, rather than your marginal tax rate.
2) Make a personal contribution and claim a tax deduction
Since 1 July 2017, you can make voluntary personal contributions to super and claim a tax deduction when you lodge your tax return for that year.
To claim a tax deduction on your super contributions make sure you:
- check the age restrictions to make sure you’re eligible to contribute to super. There is a work test to contribute if you are age 65 to 75
- lodge a ‘notice of intent to claim a deduction’ to your super fund within the timeframes and receive an acknowledgement from them.
The reality is that many people will not be able to work right up to their Age Pension age, which makes funding the years between retirement and the age pension age extremely important.
Don’t get caught short in retirement, seek advice about your retirement plans and make the most of your super.