The incoming assets test changes pose strategy questions for retirees. As of January 1 next year the amount of assets people are allowed to have outside of their home while still receiving a full pension rises, but a higher taper rate means it cuts out fully at $816,000. The asset-test measures will encourage people to organise their affairs so that they rely more on the pension and protect their asset base with the family home.
We have just been looking at the detail of the new assets test for those who are part reliant on the government pension.
The new changes are potentially horrific, and I am sure many will be affected so we need to discuss at least the broad strategies that should be considered to adapt to the test.
Let’s use the example of Betty & Bill that have a home. (The same principles apply to a single person and to those who don’t have a home.)
Right now, Bill & Betty can have assets outside the family home of just over $1.17 million and still draw a part-pension. As their assets fall, so their pension increases. It has represented a comfortable lifestyle for a great many retired couples in Australia. Sadly, that now ends.
At the bottom end of the pension scale Bill & Betty can currently have a combined asset base of $296,500, excluding the family home, and get the full pension. As of January 1, 2017, the amount of assets Bill & Betty are allowed to have while still receiving a full pension rises to $375,000. But to fund that greater pension entitlement comes a nasty attack at the other end. Instead of being able to have some $1,178,000 in investments and other assets and still gain a part-pension, the pension cuts out when your assets – excluding the home – exceed $816,000. That is a massive reduction. Because the difference between full pension allowable assets of $375,000 and the cut-out level of $816,000 there is only $441,000, there is a consequence.
Let's take Billy & Betty with just over $816,000 in assets outside the home as at January 1, 2017. They will get no pension whatsoever. But if Bill & Betty reduce their assets to $375,000 they will get a full pension of some $34,382 per year. That equates to a theoretical tax-free return of 7.8% on the $441,000 asset reduction. That return rate of around 7.8%is also applied to single people and those without a house – it's just that the amounts involved are different. There is no way that Bill & Betty are going to earn 7.8% on that $441,000 without taking extreme risks, so the government is basically telling them that they should begin to live on their capital and, as they do, that their income will be protected because they will get a greater pension.
But that is the principle. If a person is involved in this sort of game and wants to downsize their dwelling and get some cash, it may immediately slash their pension. So the harshest advice you will be given is to go off and have some cruises and let the government increase your pension.
The retired clients I know that have between $375,000 and $816,000 don’t really want to run down their hard earnt savings like that, and the gifting rules make it extremely dangerous to give the money to their kids. Because the pension rules are complex, retirees will need help. To us it seems that the government is encouraging retirees to run their asset bases down in ordinary living, so consideration to this as an option so not be discounted. The government also wants you to work, so there are rather generous allowances for work income. And so it might be possible for some retired couples to extend their working life to compensate for the pension loss – but it's a complicated and complex process.
If you are approaching retirement you need to look at this new situation with great care, because it will involve different strategies. You may decide to work longer. You may decide well before you retire to help your children. You may decide to increase the size of your house, because that is a protected asset.
There are many questions that this article can’t answer, because each individual and couple’s situation is different but they are some of the considerations that you will need to discuss your financial adviser.
It is not a happy picture for the likes of Bill & Betty who based their retirement on the returns from $1.1m plus the pension
This whole exercise may and only may save the government money in the immediate term, but in the long term it will encourage retirees to organise their affairs so that they rely heavily reliant on the government pension. Yet again a classic example of try to save and penny and paying ten pounds.
A final word: be very careful of any strategy as it could end in disaster. Make sure you talk to your financial adviser.
In preparing in this article we have not taken into account any particular persons objectives, financial situation or needs. Investors should, before acting on this information, consider the appropriateness of this information having regard to their personal objectives, financial situation or needs. We recommend investors obtain financial advice specific to their situation before making any financial investment or insurance decision.