Are you among the 325,000 Australians affected?
Many changes to superannuation were proposed in the recent federal budget but none are more likely to have an impact than the proposed changes to the Centrelink Age Pension. The changes are due to come into effect on 1st January 2017. These changes are more likely to affect you if your assessable assets are over $800,000. Is your Age Pension at risk?
More than 90,000 Australian retirees will lose their government Age Pension entitlements completely with these changes and a further 235,000 will have their benefits reduced.
How the Age Pension works
Australia’s Age Pension provides income support and a range of concessions for retirees aged 65 or over who meet the income and asset requirements.
An ‘asset’ and an ‘income’ test is applied to determine your means to self-fund your retirement. If your assessable income and assets fall below the thresholds you may be eligible for a full or part Age Pension. The benefit paid to you will be the lower of the calculated benefits resulting from each test.
The proposed changes set to take effect from 1 January 2017 relate only to the assets test. Currently, under the asset test, a couple who own their own home would receive the full Age Pension if their assessable assets are below $286,500 (this is the asset test threshold). However, if their assets are above $286,500 but below $1,163,500 they may receive a part-Age Pension – the amount of pension paid is reduced from the full entitlement as calculated by the ‘taper rate’ for every $1,000 of assets above the asset test threshold.
From 1st January 2017 the asset test threshold and the taper rate will increase.
Good news for some…
The asset test threshold is increasing, as shown below
This is good news for those with assets that fall slightly above the current asset test free threshold who currently receive a part-Age Pension but may now be eligible for a full Age Pension. But it’s not great news for those with assets above the new asset test threshold.
But here’s the rub…
The assets test taper rate is also increasing, from $1.50 to $3. This means those with assets above the new asset test threshold may have their pension benefits reduced.
The assets test taper rate determines your Age Pension entitlement if your assets exceed the assets test threshold. Currently the Age Pension entitlement reduces by $1.50 per fortnight ($39 p.a.) for every $1,000 your assets exceed the assets test threshold. By increasing the taper rate to $3, the amount of assets you can have before you’re no longer entitled to a partial Age Pension reduces. So, the couple who own their own home with assets up to $1,163,500 may lose their part-Age Pension as the upper threshold now reduces to $823,000, as shown below:
The table below highlights the impact of the new assets test on Age Pensioners:
Source: DDS & The Conversation Website
Bruce and Bridget are a retired couple both aged 68 who own their own home. They have $20,000 of personal effects, $80,000 in bank deposits, and each have $325,000 in account based pensions and starting from when they were 65 – both draw the minimum income (5% p.a.).
Under current rules, Bruce and Bridget are entitled to $8,288 p.a. each ($16,576 p.a. combined). Under the proposed rules, their Age Pension will reduce to $2,847 p.a. each ($5,694 p.a. combined). This is a combined reduction of $10,881 p.a.
Act now to protect yourself from these changes
There are strategies that can reduce your assessable assets between now and 1st January 2017 and lessen the impact on your Age Pension entitlements. Your options include:
- Purchasing a funeral bond within allowable limits: One funeral bond per person is exempt from the Assets Test, provided you don’t have prepaid funeral expenses and you’re within the permitted funeral bond allowable limit – currently $12,500 (as at 1st July 2016). Prepaid funeral expenses and burial plots are also considered exempt assets.
- Gifting within allowable limits: You can give away up to $10,000 each financial year, limited to $30,000 over five years.
- Bringing forward capital expenditure, like home renovations and holidays: You might benefit from spending early on your planned extra home fit out needs or expected home care needs.
- Extra superannuation contributions for a younger spouse who’s not yet at Age Pension age: Superannuation in accumulation phase is not assessed until you reach Age Pension age. So, contributing money into the super fund of a younger spouse might ensure those assets are not assessable.
- Annuities: In addition to fixed income benefits, the asset value of an annuity is reduced by the deductible amount/return of capital over the elapsed time period. Though, this must be offset against the low interest rate you’d be locking in.
What if I lose my Age Pension with these changes?
If you lose your Age Pension in 2017 you’ll automatically be entitled to receive a Commonwealth Senior’s Health Card or a Low Income Health Card. These cards provide access to Medicare bulk billing and also to less expensive pharmaceuticals.
Asset test changes apply after 1st January 2017, so there is still time to plan ahead. Many strategic options available to you are time-dependent, so you’d be wise to get advice and consider your options sooner rather than later. Consider this a priority if your assessable assets are approaching the new assets test upper threshold of $823,000 for a home owning couple.
If you would like to discuss the information in this article or your investment options with one of our wealth management professionals, get in touch today!
Disclaimer: All information in this article is intended to be general in nature for discussion purposes only. So you should not rely on it and seek personalised professional advice before making any decision.