Pensions are often viewed as black or white: you’re either eligible or you’re not. But that’s far from the case. Not understanding the grey areas in between is where expensive mistakes can – and do – flourish.

A sliding scale means part pensions are possible for many self-funded retirees, preserving super for longer and simultaneously opening up healthcare and other benefits that lower living costs considerably.

But even for those reliant on a full pension to survive, errors can affect the size of those payments – both when applying and years down the track.

Below are some of the biggest mistakes retirees make around the pension which, when compounded over the life of their retirement, can cost them dearly.

Mistake #1: Forgoing professional advice

This mistake is generally the root cause of all the other mistakes covered here.

You simply don’t know what you don’t know about the complex world of finances. 

Professionals – like financial advisers, accountants, and estate planning lawyers – spend years studying the field and must undertake ongoing professional development to stay up-to-date with various market and regulatory changes.

So, while there is a financial outlay to access professional advice, that cost is dwarfed by the savings you make by avoiding costly mistakes elsewhere.

Mistake #2: Not making a claim

I am amazed (or shocked) by just how many people never apply for a pension when they are eligible to do so. It’s often because of:

  • inaccurate assumptions about their eligibility
  • a perceived stigma or being too proud
  • homemakers believing only those who were in paid employment can claim a pension
  • people who were born or worked overseas and claim a foreign pension not realising they may also be eligible for an Australian part-pension 

Regardless, the result is the same: the income they could have been receiving from the government instead comes out of their superannuation or other assets. That nest egg dries up faster and they risk running out altogether with nothing left for their final years.

Even a small part-pension (if you are eligible) will preserve more of your retirement savings and keep it growing for the future.

Mistake #3: Botching the means test

The income and assets tests for the pension are based on self-reporting what you own. 

Time and again, I’ve seen people overestimate the value of assets like their car and household goods (using the new or insured value instead of the going market rate for second-hand items). They disqualify themselves from claiming their full pension entitlements based on wrong information – a real own-goal.

It quite literally pays to invest time into researching what your assets are worth to provide an accurate estimation for the assets test. Plus, this information helps you right-size your insurances too.

Furthermore, investments including superannuation will move up or down.

Mistake #4: Mistiming the transition to retirement

This mistake is a common one, as the impacts aren’t always clearly visible.

Applying too soon for a pension can see your final salary payments, termination payout and any share options or exit bonuses calculated under the income test. This can reduce your pension payments or void your eligibility entirely for that year.

Couples also need to carefully consider when both of you will retire, since one partner’s ability to claim the pension depends on the other’s income. If one of you intends to keep working, the retiring partner may only receive a reduced pension or none at all. Depending on how much that income is worth, as a couple you could be worse off financially all while the retired partner is draining more of their super in the early years of their retirement.

Mistake #5: Downsizing at the wrong time

Given the large sums of money where property is involved, downsizing at the wrong time can have major repercussions.

Downsize too early, and you may miss out on equity gains. Plus, you can only use the downsizer contribution to super once, so it’s important to make the most of it. And you need to consider not just the state of the market you are selling in, but also the costs and market conditions of where you plan to buy next.

Additionally, your home – or Principal Place of Residence (PPR) in government dealings – is exempt from both Capital Gains Tax (CGT) and the pension assets test. Once you sell it, that equity becomes money that is assessable under the pension assets test and taxable on any interest earned.

This is generally not a problem if you have planned ahead to downsize at the optimal time. But if you have no plan, or you wait until you are forced to downsize (such as for health reasons), it can come as a rude shock when your pension payments suddenly decrease and the tax office comes knocking!

Helen Baker is a licensed Australian financial adviser and author of the new book, Money For Life: How to build financial security from firm foundations (Major Street Publishing $32.99). Helen is among the 1% of financial planners who hold a master’s degree in the field. Proceeds from book sales are donated to charities supporting disadvantaged women and children. Find out more at www.onyourowntwofeet.com.au

Disclaimer: The information in this article is of a general nature only and does not constitute personal financial or product advice. Any opinions or views expressed are those of the authors and do not represent those of people, institutions or organisations the owner may be associated with in a professional or personal capacity unless explicitly stated. Helen Baker is an authorised representative of BPW Partners Pty Ltd AFSL 548754.

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