There has been a lot of speculation about potential changes to superannuation and the debate has again been politicised with Labor resurrecting plans to tax superannuation income over $75,000, previously proved as an unworkable tax. However, the Coalition did keep its commitment not to tinker with superannuation in this year’s budget, but that does not necessarily mean those nearing or in retirement can relax as significant changes to the age pension assets test were announced.
The assets test threshold has been increased, meaning you can now have $375,000 in assets before your age pension is reduced. This is great news for many since the maximum married couples’ annual indexed age pension entitlement only stretches out to $33,717 (for home owners) – hardly a comfortable lifestyle in city as expensive as Sydney. However, the Government has also increased the withdrawal rate at which a pension is reduced once the threshold has been exceeded. So now part pension entitlements will be removed once assets exceed $823,000 (previously $1.15m).
A closer look at the change in withdrawal rate shows this is significant. With low interest rates, a couple who have saved $1m in retirement would receive a lower income than other couples with assets of $375,000 or less and receiving the full age pension. The Government as stated that the measures do come with the expectations that retirees to draw down on their capital in order to live.
There are many who will see this as a disincentive to save for retirement with ideas such as retiring before reaching the pension age (67) to spend their capital to then be eligible for the full pension. Another alternative would be to buys cars, go on holidays or spending on the family home as it is exempt from the assets test. The changes may also lead to retirees investing in riskier assets as pension payments will increase by 7.8% of any decline in asset value.
So where does this sit in the whole debate about developing a sustainable system for retirement in Australia? Sadly, we have the fourth largest pool of retirement savings in the world, yet neither side of politics want to take a serious look at the big picture of how our superannuation and pension system will need to interact in order to support our aging population. Tinkering to plug holes in the budget may well continue, even after recent the Coalition commitment to never make adverse changes to superannuation – an equally short sited and unrealistic commitment.
The new age pension assets test will come into effect in January 2017… that’s if it manages to get through a hostile senate.
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.