A smarter system still has to be usable

Welcome to TRR #16 for 2026.

This fortnight, two developments highlight the gap between what the retirement income system is designed to deliver and what members actually experience in practice.

HESTA’s new research puts a number on a friction-point long suspected but rarely quantified: the very high effective marginal tax rates the Age Pension income test can impose on older Australians who keep working. It is a reminder that “expected income” under the Retirement Income Covenant is not only a product design and drawdown question. Sometimes the friction sits in the tax-transfer system itself, and the response can be as much about member understanding as policy reform.

Brighter Super’s newly announced lifetime income solution with TAL tackles a different but related challenge: helping members build income certainty before retirement, rather than waiting until an accrued balance is ready for pension phase.

Together, the two developments point to the same issue: the retirement system is becoming more sophisticated, but better member outcomes still depend on guidance, timing and getting the settings right.

New research commissioned by HESTA, and undertaken by Age Pension specialists SuperEd, quantifies the financial penalty facing older Australians who work while receiving a part Age Pension. Modelling a 67-year-old with $200,000 in super shows effective marginal tax rates climbing to 77% once employment income passes $25,000, as the income test tapers Age Pension by 50 cents for every extra assessed dollar earned (over $226 per fortnight at present for singles and $396 for couples).

The starkest cliff sits at the point pension eligibility is lost entirely, where the effective marginal tax rate exceeds 100%.

HESTA argues that this is compounded by widespread confusion, with many older Australians avoiding extra work or deferring applying for the Age Pension, on the mistaken belief that any earnings strip entitlements entirely.

The fund is calling for employment income to be removed from the income test for members already assessed as pension-eligible, linking the case to recent KPMG modelling that suggests a lift in 55-64 workforce participation, were it to rise from 69% to 77%, could add $29 billion to annual GDP.

A truncated set of results from the HESTA/SuperEd research is provided in the table below.

Source: HESTA media release, 4 August 2026. Note: The ‘effective marginal tax’ above rate compares the change in total (take-home) income for the last $5,000 of additional employment income to that $5,000 increase in employment income. The difference between the change in total (take-home) income and the $5,000 increase in employment income is the effect of “tax.” Dividing that difference by $5,000 gives the effective marginal tax rate. This calculation takes into account the loss of Age Pension benefits a person would receive if they didn’t work, and includes the impact of any taxes paid as a result of work and Age Pension income.

🔍 Lumisara's Take

This research lands squarely on the "expected income" objective of the Retirement Income Covenant. But unlike investment underperformance or poor drawdown design, the leakage HESTA identifies is a structural disincentive baked into the interaction between the tax and social security systems.

For fund trustees still calibrating retirement income strategies around asset allocation and drawdown paths, the defect here (effective marginal tax rates exceeding 66% on personal exertion income as little as $15,000) sits largely outside product design and squarely inside member education and advocacy.

We think the more consequential finding is the confusion effect, not the tax rate itself. Members withdrawing from paid work (or worse still declining to apply for the Age Pension) based on a mistaken belief that any earnings extinguish entitlement is a guidance issue, and one funds are well placed to correct through their engagement/literacy channels; tools, calculators, concierge application support and digital advice.

The KPMG modelling is helpful. By tying the issue to a GDP uplift opportunity, HESTA repositions what could read as a narrow member-benefit request into a workforce-participation argument with broader policy resonance. HESTA’s research isn’t the first such advocacy campaign tackling the income test effect on older Australians personal exertion income, but it does help to build the case for change.

Whether policymakers accept the case for excluding employment income from the income test remains uncertain, but funds don't need policy reform to act now. Closing the member knowledge gap on how the tapering actually works is an education and guidance opportunity open to any fund, with real impact for retired members today.

Brighter Super has announced it will offer an innovative lifetime income solution, becoming the first profit-to-member fund to bring this product structure to market.

The solution will roll out in two connected stages. In the first half of 2027, an accumulation-phase feature will allow eligible members to begin building future lifetime income benefits while still working. A guaranteed lifetime income option, underpinned by TAL under the new partnership, will follow in 2028.

The media release provided some illustrative modelling supported by WTW (based on representative member cohorts aged 24 to 59 with balances of roughly $27,000 to $293,000) which suggests that members could receive additional income of between $70,000 and $95,000 on average over 25 years of retirement.

CEO Kate Farrar framed the move as addressing the industry's "next challenge": converting accumulated balances into confident, durable retirement income, rather than waiting until retirement to begin that planning.

Further detail on eligibility and the mechanics of the accumulation-phase feature is still to come as delivery progresses.

Brighter Super's announcement extends a line of innovative retirement income stream-style products this newsletter has tracked since the start of the year.

AMP's Lifetime Boost (reviewed 30 January), Allianz Retire+'s AGILE (13 February) and MLC Retirement Boost (26 March) have each, in turn, built accumulation-phase mechanics designed to meet SIS Reg 1.06A's innovative income stream criteria, deploying Age Pension asset-test concessions that compound the earlier a member locks in.

Brighter Super's structure (pre-commitment during accumulation, optionality preserved, guarantee delivered by TAL as external underwriter) sits squarely in this pattern, but marks a genuine first. No profit-to-member fund has previously brought this product architecture to market, all four prior entrants being for-profit or retail-adjacent (AMP, Allianz, and MLC via Insignia). That distinction matters.

As we noted when AGILE and MLC Retirement Boost landed, these solutions have so far found their natural audience among mid-to-high balance households working with advisers to navigate the Age Pension taper trap; a cohort that profit-to-member funds, with typically lower average balances and thinner advice penetration, are less naturally positioned to serve.

Brighter Super engaging TAL, rather than building underwriting capability internally as AMP has done, suggests one answer to that mismatch: partner for the actuarial and longevity-risk expertise, and concentrate fund resources on distribution and member guidance instead.

The complexity problem we flagged with MLC Retirement Boost applies here too, arguably more acutely. A profit-to-member fund base skews toward members with less advice access than the cohorts these products have so far served, which may put added responsibility on Brighter Super's guidance and digital triage capability to carry members through a genuinely complex decision.

The two-year gap between the 2027 accumulation feature and the 2028 guaranteed income option gives the fund time to build that scaffolding before the harder product arrives. Whether it does so will be the real test.