Banking on the Age Pension

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Just days before the 2023 Federal Budget was handed down on 9 May, the Australian Bureau of Statistics released a new report including data on the number of Australians receiving the Age Pension.

The report, New Census insights on income in Australia using administrative data, has largely flown under the public radar so far.

But it contains some interesting retirement insights compiled from the 2021 Census, most notably that “nearly half of Australians aged 65 years and older receive most of their income from the Age Pension (47.8% or 2,029,000 persons)”.

That’s a powerful statistic, especially when taking into account the “Support for Seniors” expense numbers detailed a week later in the Federal Budget’s Statement 6: Expenses and Net Capital Investment.

Support for Seniors (the Age Pension) has been costed in the latest Budget at $54.87 billion for the 2022-23 financial year, rising progressively on forward estimates to $67.32 billion in 2026-27.

A growing reliance on the pension

One of the key findings from Vanguard’s How Australia Retires study, released in May, is that the Age Pension features most prominently among Australians who are still working and who have not taken purposeful steps to prepare for their retirement, and who are more likely to say the Age Pension is part of their retirement..

These steps include having a well-documented and detailed financial plan, ideally prepared by a professional financial adviser, and making extra contributions to superannuation over time.

Australians who have low confidence about their retirement generally have low expectations about the amount of income they’ll likely receive during retirement and believe the Age Pension will form the biggest component of their retirement plan.

The number of Australians receiving the Age Pension is continuing to rise, and has actually increased significantly since the 2021 Census data that the ABS has used in its recent Census insights report.

The Department of Social Services (DSS) Expanded DSS Benefit and Payment Recipient Demographics - December 2022 data shows 2,565,870 people were receiving the Age Pension at the end of last year.

This included 1,783,980 people receiving full pension payments, 393,365 people receiving part pensions as a result of the “income test”, and a further 385,525 people receiving part pensions as a result of the “assets test”.

Under the income test, individuals can earn a maximum of $190 in income per fortnight (and couples $336 per fortnight) from other sources before their pension is reduced by 50 cents for every dollar above the respective allowable limits.

Under the assets test, individuals and couples are assessed on whether they do or don’t own a home. They can hold up to a certain value of financial and other assets before their pension is incrementally reduced for every dollar above the respective allowable limits.

Single homeowners can have up to $280,000 in assets, and non-homeowners up to $504,500, before their full Age Pension starts to reduce. The Age Pension cuts out completely once singles reach maximum asset limits of $634,750 (homeowners) and $859,250 (non-homeowners), with higher cut off points for singles who receive rent assistance.

The same rules apply to couples receiving the Age Pension, but the limits are higher.

Couple homeowners can have up to $419,000 in assets, and non-homeowners up to $643,500, before their full Age Pension starts to reduce. The Age Pension cuts out completely once couples reach maximum asset limits of $954,000 (homeowners) and $1,178,500 (non-homeowners).

The growing role of the Age Pension

The DSS’s demographics data shows that there just under 400,000 Australians aged 66 to 69 that were receiving a full of part pension as of December 2022 – roughly about 15% of the total Age Pension population.

Keep in mind that this is the youngest Age Pension cohort, as individuals can potentially qualify to receive a full or part Age Pension from the age of 65 years and six months, depending on the year they were born.

The largest cohort of pension recipients (about 51%) was aged 70 to 79.

For most Australian retirees, the Age Pension forms a meaningful portion of their retirement income, and for all retirees it should be considered as part of the retirement planning process.

Two key features of the Age Pension – it is payable until one’s death, and it adjusts for inflation over time – make the Age Pension a very valuable benefit as well.

Given this, a thorough understanding of how the Age Pension works, what benefits should be expected, and its role in planning for retirement is critical.

For retirees who meet the eligibility criteria, the Age Pension can act like an inflation-protected, lifetime-income safety net.

This means that Australian retirees who are eligible for the Age Pension can expect to receive a fortnightly pay packet that maintains its purchasing power for as long as they are alive and as long as they continue to meet the assets test, income test and residency rules.

If available, it is a great resource to help meet “basic living expenses” in retirement.

Tony Kaye, Senior Personal Finance Writer
May 2023
vanguard.com.au