Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 36

Getting the most from your age pension

While conducting a client review last week, I came across a strategy that might have some application for others. The story also has some good lessons about investing for the long term.

The background story

Let me tell you about Paul. At age 62, Paul received a $550,000 inheritance from his mother and came to us for advice in 2007. By October 2007, the advice was complete and he made a $450,000 non-concessional contribution to a superannuation account in a wrap service and immediately invested in a portfolio of direct Australian shares (the All Ords was about 6,650 at the time) with some allocated to cash.

By March 2009, with markets hit by the GFC, at age 64, the super fund balance was $292,056 (All Ords about 3,100). He had not made any further contributions. Paul needed income, so he started an account-based pension, staying invested for the transition. The share portfolio did not need to be sold down and re-bought. You can do that with a wrap service, one of the many reasons they can be an interesting alternative to an SMSF.

Through the subsequent years, Paul’s share portfolio, although prima facie down in value, continued to pay dividends. The account’s share portfolio generated enough dividends supported by the cash allocation to meet all fees and the pension payments. He wasn’t forced to sell down the shares, nor did he sell down out of panic.

Fast forward to today. Paul’s account balance is back up to $360,000 (All Ords about 5,200), and he has received $117,000 in pension payments along the way. If he had panicked and sold down all his shares to cash, it would be a very different story for him.

Paul remained focussed on the dividends and being an investor in the businesses he owned a share of. He was invested in good companies in important industry sectors, with strong balance sheets making strong profits and paying reliable dividends. If a company no longer met those criteria, he listened to advice and then and only then would he sell to reinvest into companies that did.

The Income Test kicker

Paul is married and claims a part age pension assessed under the Income Test. Account-based pensions are not deemed for the Income Test. (In the May 2013 Federal Budget, the Labor Government proposed to ‘deem’ new account-based pensions that commenced on or after 1 July 2015. At the time of writing, no legislation has been drafted, and the Coalition Government’s stance on this issue is unclear). The pension income drawn is assessable by Centrelink; however, it is reduced by a ‘deductible amount’. This deductible amount is calculated as the purchase price divided by the member’s life expectancy at the time of purchase. For Paul, this formula worked out to be: $292,056 / 22.85 = $12,781

With Paul drawing an annual income of $36,000, Centrelink assessed him as receiving $23,218 assessable income from the account-based pension, and that was really hitting his and his wife’s age pension benefits.

Now that Paul’s account balance has come up again, and his life expectancy is lower because he’s aged a few years (it is now 15.49 years), we have decided to re-set the account-based pension so that the deductible amount formula is now: $360,000 / 15.49 = $23,241.

Of the $36,000 a year he is drawing, Centrelink will now only count $12,759 and as a result his age pension income will go up by as much as $172 a fortnight.

How does he re-set his account-based pension? He just rolls from his current account to a new account-based pension in the same wrap service. Again, in his case, there is no selling down of investments to then re-buy them (and in the process incurring brokerage charges). With his wrap account, the shares he already owns are transferred to his new pension account: it’s just a matter of paperwork. You can do that with a wrap service, and in fact you can also do it within your SMSF – it just requires paperwork.

With the markets recovering, if you are a part pensioner assessed under the Income Test and have an allocated or account-based pension, check with your adviser to see if it’s worth re-setting the deductible amount to improve your Income Test. It’s a quick and easy calculation with great ongoing potential benefits.

Alex Denham was Head of Technical Services at Challenger Financial Services and is now Senior Adviser at Dartnall Advisers.


 

Leave a Comment:

     

RELATED ARTICLES

Hey baby boomers, pension is not a dirty word

A fundamental flaw in the Australian retirement system?

The state of play in the funds management industry

banner

Most viewed in recent weeks

Super changes, the Budget and 2021 versus 2022

Josh Frydenberg's third budget contained changes to superannuation and other rules but their effective date is expected to be 1 July 2022. Take care not to confuse them with changes due on 1 July 2021.

Noel's share winners and loser plus budget reality check

Among the share success stories is a poor personal experience as Telstra's service needs improving. Plus why the new budget announcements on downsizing and buying a home don't deserve the super hype.

Grantham interview on the coming day of reckoning

Jeremy Grantham has seen it all before, with bubbles every 15 years or so. The higher you go, the longer and greater the fall. You can have a high-priced asset or a high-yielding asset, but not both at the same time.

Whoyagonnacall? 10 unspoken risks buying off-the-plan

All new apartment buildings have defects, and inexperienced owners assume someone else will fix them. But developers and builders will not volunteer to spend time and money unless someone fights them. Part 1

Buffett says stock picking is too hard for most investors

Warren Buffett explained why he believes most investors should not pick stocks but simply own an S&P 500 index fund. "There's a lot more to picking stocks than figuring out what’s going to be a wonderful industry."

Should investors brace for uncomfortably high inflation?

The global recession came quickly and deeply but it has given way to a strong rebound. What are the lessons for investors, how should a portfolio change and what role will inflation play?

Latest Updates

Exchange traded products

ETFs are the Marvel of listed galaxies, even with star WAR

Until 2018, LICs and LITs dominated ETFs, much like the Star Wars franchise was the most lucrative in the world until Marvel came along. Now ETFs are double their rivals, just as Marvel conquered Star Wars.

Shares

Four leading tech stocks now look cheap

There are few opportunities to buy tech heavyweights at attractive prices. In Morningstar’s view, four global leaders are trading at decent discounts to their fair values, indicating potential for upside.

Shares

Why copper prices are at all-time highs

Known as Dr Copper for the uncanny way its price anticipates future economic activity, copper has hit all-time highs. What are the forces at play and strategies to benefit from the electric metal’s strength?

Economy

Baby bust: will infertility shape Australia's future?

In 1961, Australian women had 3.5 children on average but by 2018, this figure stood at just 1.7. Falling fertility creates a shift in demographics and the ratio of retirees to working-age people.

SMSF strategies

The Ultimate SMSF EOFY Checklist 2021

The end of FY2021 means rules and regulations to check for members of public super funds and SMSFs. Take advantage of opportunities but also avoid a knock on the door. Here are 25 items to check.

Economy

How long will the bad inflation news last?

The answer to whether the US inflation increase will prove temporary or permanent depends on the rates of growth of the quantity of money. It needs to be brought down to about 0.3% a month, and that's a problem.

Economy

The ‘cosmic’ forces leading the US to Modern Monetary Theory

If the world’s largest economy adopted a true MMT framework, the investment implications would be enormous. Economic growth would be materially greater but inflation and interest rates would also be much higher.

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.