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The retirement income system explained

In Australia, there is a strong retirement income system in place to ensure older Australians are financially supported during their retirement days.

Last updated: February 14th 2022
The Australian retirement income system can ensure all older people are being funded in some form during their retirement. [Source: Shutterstock]

The Australian retirement income system can ensure all older people are being funded in some form during their retirement. [Source: Shutterstock]

Key points:

  • There are three ‘pillars’ to Australia’s retirement income system, including voluntary savings, compulsory superannuation, and the means tested Age Pension.
  • Talk to a financial advisor to discuss important financial matters and to organise an appropriate financial plan that fits your needs
  • You should be considering each of these incomes within your retirement plan, including how you intend to use them together

The three ‘pillar’ system includes – savings, including homeownership and voluntary contributions to super; compulsory superannuation, and the Age Pension.

For most older Australians, you will likely require all three of these income streams to fund yourself in retirement. How you live your life can impact on each of these pillars, including workforce and unemployment, superannuation fees or account management, and investment decisions.

So how does each pillar work?

Voluntary savings

The best time to start saving for retirement is now! While it can be hard to put money aside every week or month, even if you only save a little bit, it will be beneficial when you get to retirement age.

Your voluntary savings include both the superannuation you contribute – like salary sacrificing or personal contributions – as well as your savings in the bank and any investments you have. Your own home is also considered a saving instrument in retirement, as it reduces how much you spend on accommodation costs.

Over the years, you have likely saved up to buy a house, car or holiday, similarly, you should be doing the same to grow your retirement savings.

Everyone should be putting money aside into their savings or superannuation to prepare themselves for funding their retirement as well as growing their savings through other means.

Another way to increase this income stream is by diversifying and growing your investments, such as property or shares. Your savings should be actively growing outside of what you earn from work, which is why you should talk to a financial advisor about developing a retirement plan and the best way for you to grow your savings for retirement and also develop a retirement plan.

Compulsory superannuation

From the day you start working, your employer is required to pay the superannuation guarantee (SG). This money is a minimum amount that an employer has to put into your super account over the time you work with them.

The SG only came into effect in 1992, so a lot of people currently in retirement or reaching retirement age are likely to have missed out on the benefits of this scheme before that.

The aim of the SG is to ensure that a portion of everyone’s salary is going towards their future in retirement, and a comfortable retirement at that. The younger you were when you started work and the longer you work for can have an effect on how much you have left when you reach retirement.

You can only access your superannuation after the age of 55 and it’s important to monitor your super over the years to ensure your employer is paying your SG, consider market fluctuations, and potentially moving to a new super provider. You can learn more about changing your superannuation provider here.

Age Pension

Not everyone will get to retirement with enough savings or superannuation saved up, which is where the Age Pension becomes really important.

The Pension is a Government safety net to ensure Australia’s oldest citizens are receiving an adequate amount of money to live modestly in this country.

Most older retirees receive full or part income support through the Age Pension and many older people will go onto the Age Pension after exhausting their savings and superannuation.

Together with the other income streams, the Age Pension aims to make sure all older retirees can live a modest or comfortable lifestyle.

Your income or assets determine if you are eligible for the Age Pension and how much you receive.

If you are below a certain amount of super and assets, you may be able to receive a Part Pension.

You can learn more about the Age Pension and applying for the income support on the Aged Care Guide.

Three pillars

All three pillars together create a safety net for older Australians who are reaching or are in their retirement.

It can ensure that if your savings don’t last you in retirement, then you can rely on your superannuation, and if your superannuation doesn’t last, you can rely on the means tested Age Pension. And generally, these three pillars work together, not separately.

When you are approaching your retirement, you should be considering each of these pillars and how they will work in your retirement plan.

Are you prepared financially to enter retirement? Tell us in the comments below.

Related content:

Planning for a secure retirement
How do financial advisors help with retirement planning?
Important questions to ask your financial advisor
What to consider when choosing a super fund


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