For just over 30 years, superannuation guarantee (SG) contributions have been a part of life in Australia. Starting in 1991, each working Australian has likely had some benefit. Where initial contributions to superannuation were one per cent of salary, it has since risen to 10.5 per cent, with another increase due 1 July 2023, where it will rise to 11 per cent.
These contributions are made by employers on behalf of their employees and means that every working Australian is saving money that will one day be available to them to draw on and support their retirement.
According to the Treasury1, without SG contributions, the likelihood is that “most people would not save enough voluntarily for their retirement on their own”. Additionally, without government intervention and the creation of our superannuation system, many people would experience a radical reduction in their living standards in retirement.
For many people in retirement, the expectation is that they will rely on a combination of the following financial resources when they permanently leave the workforce:
- compulsory superannuation (Superannuation Guarantee)
- personal savings, including superannuation outside SG, their home, and other investments, and
- the Age Pension.
The Age Pension plays a pivotal role for retirees in Australia and safeguards people from outliving their savings, particularly for those who were lower or middle income earners. For these people, the Age Pension is likely to form a significant part of their retirement income. The Age Pension ensures that all Australians have a minimum standard of living in retirement.
Standards of living in retirement
Australians are divided into three key cohorts when it comes to how the current Age Pension supports living standards in retirement:
- Lower income earners who rely on the Age Pension to support their standard of living in retirement. For this group, many experience an increase in living standards when they start receiving the pension payments. They have superannuation savings, but their account balances tend to be quite low.
- Middle income earners require a combination of superannuation, savings from outside super, and the Age Pension to maintain their living standards in retirement. They have more in superannuation savings than the lower income earners, but not enough to sustain their lifestyle without the support that the Age Pension delivers.
- High income earners don’t generally receive the full Age Pension as they have sufficient savings in superannuation, other investments, and their home to maintain their living standards in retirement.
Whilst the government makes the Age Pension available for eligible retirees, this provision is often under scrutiny. That’s not to say that it won’t be available in the future. What it does indicate though is that there may be changes. What these changes look like will depend on economic and government fluctuations in the future.
For example, the Age Pension was traditionally available to everyone from the age of 65. This slowly increased in recent years to age 67, and there is some speculation that the age of entitlement may increase again. There was also tightening to the assets test several years ago, which reduced the eligibility for the Age Pension for many retirees. There is no guarantee that similar changes won’t recur in the future.
So, what does the Age Pension give you?
The Age Pension rates from March to September 2023 are $27,664 per annum for singles and $41,704 per annum for couples. According to the Australian Super Funds Association 2020 report on Superannuation and Australians’ expectations2, 75 per cent of respondents said that they would struggle to live on the Age Pension, and 50 per cent said they didn’t think that they would live comfortably on the Age Pension alone.
This means for those nearing retirement, you need to take the initiative and proactively plan what you will need in retirement – and the sooner the better. You might be lucky to have enough money with the Age Pension, your superannuation, and other investments all rolled into one, but if you don’t KNOW this for sure, you’re leaving things to chance. It’s also so much harder to significantly increase your super balance once you’ve retired.
The key message is that it’s never too early to start planning for your retirement. It’s also not a great idea to bury your head in the sand and think things will take care of themselves. Unfortunately for most people who ignore their super until their mid-late 50’s, it can be hard work to get their super balance where it needs to be to support them in retirement.
Remember, it’s important to understand your needs, and to think about how you want to live in retirement. Whilst most people will have the benefit of superannuation guarantee contributions and the Age Pension, you need to understand your own situation, what you will have saved based on your current contributions, and what this will give you as an annual income on top of the Age Pension, if you qualify.
If living on the Age Pension is not enough for you, you need to ensure that you plan for how you can improve your situation sooner rather than later.
1 Retirement Income Review Final Report - https://treasury.gov.au/sites/default/files/2021-02/p2020-100554-ud05_cohesion.pdf.
2 Australian Superannuation Funds Association research intro Superannuation And Australians’ expectations, November 2020 Polling Project, page 6 - 210428-ResearchProject.indd (superannuation.asn.au).
For just over 30 years, superannuation guarantee (SG) contributions have been a part of life in Australia. Starting in 1991, each working Australian has likely had some benefit. Where initial contributions to superannuation were one per cent of salary, it has since risen to 10.5 per cent, with another increase due 1 July 2023, where it will rise to 11 per cent.
These contributions are made by employers on behalf of their employees and means that every working Australian is saving money that will one day be available to them to draw on and support their retirement.
According to the Treasury1, without SG contributions, the likelihood is that “most people would not save enough voluntarily for their retirement on their own”. Additionally, without government intervention and the creation of our superannuation system, many people would experience a radical reduction in their living standards in retirement.
For many people in retirement, the expectation is that they will rely on a combination of the following financial resources when they permanently leave the workforce:
- compulsory superannuation (Superannuation Guarantee)
- personal savings, including superannuation outside SG, their home, and other investments, and
- the Age Pension.
The Age Pension plays a pivotal role for retirees in Australia and safeguards people from outliving their savings, particularly for those who were lower or middle income earners. For these people, the Age Pension is likely to form a significant part of their retirement income. The Age Pension ensures that all Australians have a minimum standard of living in retirement.
Standards of living in retirement
Australians are divided into three key cohorts when it comes to how the current Age Pension supports living standards in retirement:
- Lower income earners who rely on the Age Pension to support their standard of living in retirement. For this group, many experience an increase in living standards when they start receiving the pension payments. They have superannuation savings, but their account balances tend to be quite low.
- Middle income earners require a combination of superannuation, savings from outside super, and the Age Pension to maintain their living standards in retirement. They have more in superannuation savings than the lower income earners, but not enough to sustain their lifestyle without the support that the Age Pension delivers.
- High income earners don’t generally receive the full Age Pension as they have sufficient savings in superannuation, other investments, and their home to maintain their living standards in retirement.
Whilst the government makes the Age Pension available for eligible retirees, this provision is often under scrutiny. That’s not to say that it won’t be available in the future. What it does indicate though is that there may be changes. What these changes look like will depend on economic and government fluctuations in the future.
For example, the Age Pension was traditionally available to everyone from the age of 65. This slowly increased in recent years to age 67, and there is some speculation that the age of entitlement may increase again. There was also tightening to the assets test several years ago, which reduced the eligibility for the Age Pension for many retirees. There is no guarantee that similar changes won’t recur in the future.
So, what does the Age Pension give you?
The Age Pension rates from March to September 2023 are $27,664 per annum for singles and $41,704 per annum for couples. According to the Australian Super Funds Association 2020 report on Superannuation and Australians’ expectations2, 75 per cent of respondents said that they would struggle to live on the Age Pension, and 50 per cent said they didn’t think that they would live comfortably on the Age Pension alone.
This means for those nearing retirement, you need to take the initiative and proactively plan what you will need in retirement – and the sooner the better. You might be lucky to have enough money with the Age Pension, your superannuation, and other investments all rolled into one, but if you don’t KNOW this for sure, you’re leaving things to chance. It’s also so much harder to significantly increase your super balance once you’ve retired.
The key message is that it’s never too early to start planning for your retirement. It’s also not a great idea to bury your head in the sand and think things will take care of themselves. Unfortunately for most people who ignore their super until their mid-late 50’s, it can be hard work to get their super balance where it needs to be to support them in retirement.
Remember, it’s important to understand your needs, and to think about how you want to live in retirement. Whilst most people will have the benefit of superannuation guarantee contributions and the Age Pension, you need to understand your own situation, what you will have saved based on your current contributions, and what this will give you as an annual income on top of the Age Pension, if you qualify.
If living on the Age Pension is not enough for you, you need to ensure that you plan for how you can improve your situation sooner rather than later.
1 Retirement Income Review Final Report - https://treasury.gov.au/sites/default/files/2021-02/p2020-100554-ud05_cohesion.pdf.
2 Australian Superannuation Funds Association research intro Superannuation And Australians’ expectations, November 2020 Polling Project, page 6 - 210428-ResearchProject.indd (superannuation.asn.au).