This afternoon I was talking with a client who is going to be one of over 300,000 Australian retirees that are expected to lose their Age Pension from 1 January 2017. An eligible individual must satisfy both the income and assets test to receive a full, or part pension. The amount will be based on the test that delivers the lowest entitlement.
As of 1 January 2017, the federal government has increased the lower asset value threshold from when a pension is reduced, but also dramatically lowered the value of assets pensioners can hold before they begin to lose their payments altogether. The asset thresholds will be as follows:
- Single Homeowner part pension from $250,000 cutting out at $542,500
- Single Non-Homeowner part pension from $450,000 cutting out at $742,500
- Couple Homeowner part pension from $375,000 cutting out at $816,000
- Couple Non-Homeowner part pension from $575,000 cutting out at $1,016,000
But here’s the sting. When assets exceed the new threshold, the pension will be reduced at a much greater $3 per fortnight (previously $1.50) for every $1,000 excess of assets. Therefore, if assets exceed the new threshold by $100,000 the pension would reduce by $300 per fortnight, or $7,800 per annum. Those assets would need to earn more than 7.8% p.a. for the pensioner to be better off, which will be difficult. Even shares paying fully franked dividends or listed real estate investment trusts don’t generate annual yields as high as this, while term deposits and bonds only yield around 3 per cent.
The new test will add to the difficulty of funding retirement and careful planning is required. Outlined below are five strategies that can help maximise pension entitlements.
- Re-contributing super from an older to younger spouse could be effective as superannuation is exempt in the accumulation phase until they reach pension age.
- Renovating the family home or upsizing, given the value tied up in the family home is exempt from any pension eligibility test.
- Gifting money to children or grandchildren – $10,000 per year, or $30,000 over five years, can be gifted without being subject to the assets test.
- Pre-paying funeral expenses or purchasing a funeral bond of up to $12,500 may assist in reducing assessable assets.
- Investing in lifetime annuities, which can provide advantages under the income and assets test, but beware of underlying fees and it being eroded by inflation over time.
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!
Rob Gilmour is the Managing Principal of Wealth Simplicity. The information provided should not be considered personal financial advice as it is intended to provide general advice only. The content has been prepared without taking into account your personal objectives, financial situations or needs. You should seek personal financial advice before making any financial or investment decisions.