The aged pension: one of the three pillars of the retirement system

A client recently mentioned to me that their goal was to never have to rely on the aged pension.

We were implementing a few strategies for them to maximise their pension entitlements and they wondered whether it was worth it for them as they felt the Centrelink aged pension was not for them.

What is the Centrelink aged pension

When it comes to Centrelink, most of the services they provide are considered ‘safety nets’. These are payments to help people facing financial challenges.

Because of this, sometimes people lump the aged pension in with this thinking it’s just for those people who are struggling financially. But this isn’t the case.

The three pillars of the retirement system

Our entire retirement system has been set up in Australia on the basis of the ‘three pillars of the retirement system’.

These are:

• The Centrelink aged pension
• Compulsory superannuation contributions
• Voluntary savings

The idea of the three pillars is the combination of all 3 should hopefully be sufficient to fund most people’s retirement.

In the case of the aged pension, it’s expected that most people will utilise this in some way or another during their retirement in combination with their super contributions and voluntary savings.

So how does the aged pension work?

Once you hit the age requirement for the aged pension (currently 67), your eligibility is based on your income and your assets.

If you are still working past the age of 67, it’s possible that your income may be too high to qualify for an aged pension. If however you and your partner have both ceased work, then the income test may not be a consideration.

The main consideration for most people is the assets test. This test determines the value of your assets (excluding your family home). If the value of your assets are too high, you may be ineligible for a pension. If however they are below a certain amount, you will become eligible for either a part pension or full pension.

How does the pension work with my superannuation?

In most instances, by the time you retire, most of your assets should be in superannuation (except for your family home). There are tax reasons for this which are outside the scope of this blog.

This means that the value of your superannuation will affect how much aged pension you receive.

The amounts for a partial pension are quite generous and for most people, if they’re not eligible straight away, they will most likely be eligible at some point throughout their retirement.

The idea is your aged pension acts as a base income. It’s guaranteed, is not affected by investment markets and gives you a small amount to fund your life.

You then withdraw from your super to ‘top up’ what you need for your lifestyle expenses.

The goal is to retain your super as long as possible as you don’t want to be reliant on the aged pension solely.

So when should I claim the aged pension?

At Bounce Financial, we usually work with people prior to retirement in those savings years. Because of this, we don’t get a good insight into how people utilise the aged pension.

My fear (which I haven’t personally witnessed) is a lot of people are setting up withdrawals from their superannuation to fund their lifestyle without enquiring regarding their aged pension entitlements.

They may be running their super down to nothing before reaching out to Centrelink to claim an aged pension.

If this happens, you’ve done yourself out of a lot of money and potentially a number of years of a comfortable retirement.

From the age of 67, you should be enquiring regarding your entitlements to the aged pension and understanding what the value of your assets are. This means that when you become eligible, you can claim straight away and ensure you preserve your superannuation as long as possible.

Summary

If I was going to summarise the purpose of this blog, what I wanted to highlight is that the aged pension is not solely for people struggling with money, instead it’s a right which forms a big part of how you should be funding your retirement. You’ve paid taxes all your life and this system is set up to support you during retirement.

By understanding your entitlements early, you can ensure you are maximising your retirement benefit and preserving your superannuation for future costs that may come up in hopefully what is a very long and rewarding retirement.

If you’re wondering how to set yourself up for retirement, then please reach out by dropping us an enquiry on our website. We work with professional families and pre-retirees all over Australia and would love to hear from you.