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Pension winners and losers from 1 January

The biggest changes to the pension asset test in 10 years will occur in two months, on 1 January 2017.

Whenever the government makes such drastic changes it creates winners and losers, while some that stay the same will worry about the changes nonetheless. If you’re a pensioner the important thing is to know which bucket you fall into and make a plan for how best to deal with it. If you’re a financial adviser, communicating with your clients about the changes and the impact on them and putting strategies in place to minimise the consequences are imperative.

What is changing?

Currently the asset thresholds (ignoring the value of an owner-occupied home) are:

  • Single Homeowner $209,000
  • Single Non-Homeowner $360,500
  • Couple Homeowner $296,500
  • Couple Non-Homeowner $448,000

The fortnightly pension payment reduces by $1.50 for every $1,000 over the assets test threshold. To put it into context, if a pensioner exceeds the asset test by $100,000, their pension reduces by $150 per fortnight, or $3,900 p.a. If they can earn more than 3.9% p.a. on that asset then they may be better off investing the money rather than taking the pension.

Post 1 January 2017, the asset thresholds will increase to:

  • Single Homeowner $250,000
  • Single Non-Homeowner $450,000
  • Couple Homeowner $375,000
  • Couple Non-Homeowner $575,000

But here's the sting. When assets exceed the new threshold, the pension will be reduced by $3 per fortnight for every $1,000 excess of assets. So if assets exceed the new threshold by $100,000 the pension would reduce by $300 per fortnight, or $7,800 p.a. Those assets would need to earn more than 7.8% p.a. for the pensioner to be better off. This will not be easy to achieve and may result in some people reducing their assets and putting the money into their family home to achieve a better pension outcome (although this may reduce available liquid assets by $100,000).

Don’t forget the income test

Of course, the pension is calculated under two tests: an asset test and an income test (with the one that produces the lowest pension entitlement being applied). In all the hype about the asset test changes it is important not to forget the income test. The government has not reported any changes to the threshold or taper rate for this.

The income test does not assume a portfolio of purely cash and fixed interest. The current deeming rate on the amount above $49,200 (single) or $81,600 (couple) is 3.25%, a rate of return that is hard to get in cash or term deposits. The income test reduces pension entitlement by 50 cents per dollar above the income threshold (about $4,264 for single and $7.592 for a couple), regardless of whether it is actual income or deemed.

Let’s look at some examples, starting with a winner …

Betty is a single homeowner with $248,000 of assessable assets outside her home.

Her pension entitlement now is $819 per fortnight, and post 1 January 2017 her pension will be $877 per fortnight if the majority of Betty’s assets don’t produce income: for example cars, caravans, boats, vacant blocks of land and trusts don’t produce taxable income.

But what if Betty’s assets were primarily income producing? If she has $240,000 in investments and $8,000 in personal assets, then she is still a pension winner but her pension will increase by only $4 per fortnight not $58.

Now let’s look at those who will stay the same, which is basically anyone who is currently receiving the full pension. Why? Because the changes will increase the asset test thresholds but anyone on a full pension is already under the required level.

Kevin is a single homeowner with $130,000 in investments and $20,000 in personal assets. He is entitled to $877 per fortnight under the asset test and the same under the income test. From 1 January 2017, his pension will remain the same.

As an example of how people will lose out under these changes, Fred and Shirley are homeowners with $600,000 in investments and $50,000 in personal assets.

They currently receive $792 per fortnight of pension entitlement (combined) and they earn $15,000 p.a. from their investments, meaning that their combined annual income is a little over $35,000.

Post 1 January, their pension will drop to around $497 per fortnight (combined), which means that their combined annual income (assuming they continue to earn $15,000 p.a. from their investments) will be around $28,000.

The major consequences

There are a couple of key messages the government is sending to retirees in these changes. The first is that the means-testing arrangements are likely to get tougher not easier and the second is that cash and fixed interest investments are not risk free.

If investment returns are not sufficient to meet the cash flow needs of retirees, they will be forced to dip into their capital. Sure, if the investments are in cash or term deposits, they are not at risk of the same volatility as they are in shares. However, the irony is that avoiding the potential drop in the value of the investments due to market volatility doesn’t mean they are preserving the value of their capital. It’s just that the retiree is eating it, not the market.

The bottom line is that retirees need to take more responsibility (and maybe a little more risk) in meeting their retirement income needs. While these changes are the biggest we have seen in nearly 10 years, don’t expect they will be the last for another decade.

 

Rachel Lane is the Principal of Aged Care Gurus and oversees a national network of financial advisers specialising in aged care. This article is for general educational purposes and does not address anyone’s specific needs.

 

12 Comments
Bob Spermon
November 27, 2016

I wonder if the politicians are going on the same deal as the rest of Australia. Or will they still be giving themselves $200.000 plus every year when they retire?
Remember this next time you go to the polls.

Ken Gersbach
November 27, 2016

Yes that's right attack the pension. When these shocking governments need money to prop up their lunatic policies they go straight to pensions or the health budget.

Anne Powles
November 25, 2016

Perhaps it should also be related to pensioner age. There is quite a difference between a pensioner aged in the 60s and the need to continue to preserve some assets and a pensioner in the 80s who has obviously less worries about dipping into capital.

SMSF Trustee
November 07, 2016

"It is possible to earn 5% pa with absolutely minimal risk."

No it isn't! The risk free rate of return is 1.5% at the moment. For a ten year cash flow return that has no risk to the cash flows, but some mark to market volatility, the return is 2.4%. (IE 10 year government bonds)

Anything that will earn more than that carries risk. The risks are manageable, and it's possible to put a good portfolio together that over time can be expected to deliver 5% pa, but it's wrong and irresponsible to say that 5% is achievable without risk taking.

If I could find 5% risk free I'd be there for sure, but it's not possible.

rudi horvat
November 07, 2016

I did say minimal risk.
Government guaranteed [<$250K]term deposits pay up to 3.3% p.a. Rated direct bonds will take deposits as low as $10,000 and pay from 3.5 to 5.5% p.a. Highly rated income funds are delivering returns in excess OF 5% p.a. Well diversified long term investments can in deed be expected to return 5% p.a. with low volatility [low risk] over a 10-20 year periods.
My point is, that even if you earned 3% p.a. [term deposits] in the current environment. It is all about preservation of capital in retirement rather than overreaction to government or market uncertainties.

rudi horvat
November 06, 2016

Don't overreact . Think about it.
$100k draw down over 20 years is $5k p.a. plus interest. and it is possible to earn 5% p.a. with absolutely minimal risk. You also then recive increasing pension as reduction in assets occurs.
You retain your capital control and not take crazy risks, including greater exposure to investment risk.
Of course you are better off using your hard earned retirement savings and retaining your options then letting the market wipe it out.

Mark Hayden
November 05, 2016

..."Those assets would need to earn more than 7.8% p.a. for the pensioner to be better off"...this is, I believe, a terrible headline/hook by Graham, Chris or Rachel. To illustrate my point: Person A has $100,000 and eats into a bit of their capital to replace the Age Pension but is still better off than Person B. At end of year 1 Person A has $96,000 (say) and Person B has zero. And the rate of them eating into their capital slows down as Person A get more Age Pension each year.

SMSF Trustee
November 05, 2016

But your residence doesn't generate cash flow. How does its value make one bit of difference to your ability to fund daily living?

Melinda Houghton
November 04, 2016

I still find it incredibly inequitable that there is no upper cap on the non-assessed principle residence. It is very unfair for someone with a house worth $400,000 to lose age pension with the same amounts of other assets as someone with a house worth $1,200,000. In many suburbs of Melbourne, many people have decided to have lower value houses but have more cash to top up their retirement. This is now backfiring on them. Whereas those in high value properties can have their cake and eat it too.
Crazy. All they would have to do would be put an upper cap on the principal residence exemption to bring equity back to the equation. e.g. your house is exempt up to $750,00 or $1,000,000. Over that is assessed.

Laine
November 04, 2016

Spend $100k on a round the world trip for two and be $5300 a year better off for the rest of your life - the $7800 extra pension you receive less the $2500 you lose in term deposit interest on your $100k.

That's better than any annuity currently available.

My main concern with these changes is that it encourages pensioners to hide assets - the $100k in cash hidden under the mattress is also leaving you $5300 a year better off.

We should never put anyone in this situation, particularly old people who sometimes don't think completely rationally.

A couple retiring with $850k will no longer get a pension. If they want the closest equivalent to a pension, an indexed lifetime annuity, they will get around $28k per year to live on for the rest of their days. If they had never saved anything and were on a full pension, they would have $34k a year to live on.

This doesn't really encourage anyone to save for their retirement, does it.

Zorro
November 04, 2016

Editor note: We don't recommend this but open it in the interest of debate.
I'm 67 and not a gambler BUT a friend of mine suggested picking a reasonably capable horse at the races at say 10 to 1 - use 100k of your Super by putting 50k to win and 50k a place bet. In the worse case if you lose the lot you still get the $7,800 extra pension for life (or $5,300 for life depending on how you look at it). The Government has not thought this through - us "middle roadkill group of 300,000" are not stupid!!

Jack
November 03, 2016

This pension change will backfire. Put your money into your home and take it out of other assets and earn 7.8% in extra pension. Easy.

 

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