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Adapting to new pension asset testing

Despite the rumours, superannuation and negative gearing were left untouched in last month’s Budget. However, the government announced a change in attitude to wealthy pensioners by amending the pension asset test thresholds and taper rate from 1 January 2017.

By increasing the level at which the pension starts to reduce due to assets, and by steepening the taper rate itself, they managed to increase the pension for many less affluent recipients while reducing it, or even removing it, from the wealthy ones.

Impact of the changes

For a single homeowner, the base will rise from $202,000 to $250,000 and for a homeowner couple it will rise from $286,500 to $375,000. The cut-off points will be around $535,000 for single homeowners, and $810,000 for homeowner couples.

These are approximate numbers, as the changes will not take effect until 2017, and the thresholds will be increased on 1 July each year by the CPI.

This will hit retirees with substantial assets hardest. An age pensioner couple with $750,000 of assessable assets should currently be receiving $602 a fortnight pension. Under the new rules, this would drop by $430 a fortnight, or $11,180 a year. That’s going to have a big impact on their budget.

Many people make the mistake of valuing non-investment assets at replacement value – they should be valued at second hand value. This would put a figure of $5,000 on most people’s furniture. The new taper figures mean that every $10,000 of assessable assets has an effect of $780 a year on the pension. Overvaluing your car and furniture by $50,000 will cost you $3900 a year in pension, whereas spending $100,000 on travel and house renovations (thus reducing your assets) will increase your pension by $7800 a year indexed for life. That's equivalent to a capital-guaranteed return of 7.8% per annum on your money.

You can also reduce your assets by gifting part of your money away, but seek advice before you do so. The Centrelink rules allow gifts of only $10,000 in a financial year with a maximum of $30,000 over five years. Using these rules a would-be pensioner could gift away $10,000 before 30 June and $10,000 just after it, and so reduce their assessable assets by $20,000.

A couple could also invest $12,000 each in funeral bonds, which are exempt under the assets test.

May not be the end of the changes

I was discussing the changes on radio recently and a listener pointed out that under the proposed rules, a person with $900,000 in assets would get no pension whatsoever, and if their money was in the bank earning 3%, the income generated would be just $27,000 a year. They contrasted this with the situation of a full pensioner with minimal assets, who would be getting $34,000 a year indexed.

It’s a valid point, but as I said to the listener, the person with $900,000 would be taking a very high risk if they kept their money in cash. They should have a diversified portfolio, which hopefully should be giving them at least 6%.

Yes, I am well aware that many retirees are risk averse – this is why I have been urging my readers for years to get acquainted with growth assets like shares at as early an age as possible. Doing this means they won’t panic and sell out when the market has one of its normal downturns.

One last piece of advice – be wary of spending unnecessary money just to get a higher pension. The fact that the government has been forced to back away from the hard decisions in the Budget is a clear indication that it may be many years before Australia's finances are restored – further cuts to welfare must be expected.

 

Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. See www.noelwhittaker.com.au.

 

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