5 strategies to prepare for pension assets test changes
Page 1 of 1
There are a number of strategies that retirees can implement to help them retain or improve their cash flow when changes to the pension assets test take effect.
Over 300,000 Australian retirees are expected to lose their Age Pension from 1 January 2017, with the federal government dramatically lowering the value of assets pensioners can hold before they begin to lose their payments.
There will be many more losers than winners. The federal government estimates 326,000 people will lose some or all of their pension as disqualifying limits for the part Age Pension payment have been reduced.
The assets test threshold, or disqualifying limit, is the maximum value of assets you can have before they affect your Age Pension payment.
On the other hand, around 170,000 people will have their pension payments increased as full pension thresholds have been raised.
For a couple aged over 65 years and on the pension, if they hold more than $816,000 in net assets (excluding the family home), then that couple will no longer receive a part pension from 1 January 2017. That threshold of allowable assets has been reduced from $1,178,500.
For single homeowners, their pension will cut out entirely if they have more than $542,500 in net assets, down from the existing allowable asset limit of $793,750.
For singles that don't own their own home, they can hold only $742,500 in assets before their part pension is reduced, down from $945,250.
For a couple who rent, they can have net assets of $1,016,000 before they lose the pension entirely, with that threshold down from $1,330,000.
But there is some good news in that more people will be able to qualify for the full pension as full pension thresholds have been raised from January 2017.
Couples that own their own home can now hold up to $375,000 in assets (excluding the family home) and still qualify for the full pension. That asset threshold has been increased from $296,500.
An individual can hold up to $250,000 to qualify for the full pension, with that threshold up from $209,000 from 1 January 2017.
A non-homeowner couple can hold up to $575,000 in assets, up from $448,000, while a single non-homeowner can hold up to $450,000 in net assets, up from $360,500, and still get a full pension.
However, once the upper asset thresholds have been reached, people's pensions will reduce at a dramatically faster rate from 1 January 2017 than before.
Pensions will reduce by $3 per fortnight for every $1,000 of assets held above the lower assets test threshold, up from the current rate of $1.50 per fortnight.
Commonwealth Bank of Australia executive general manager, Linda Elkins, said it is important for retirees to plan for the changes by checking their financial positions with Centrelink and discussing the changes with a financial adviser.
"There are a number of strategies retirees can implement now to help them retain or improve their cash flow when the asset changes take effect," Elkins said, suggesting five areas that could be considered by retirees affected by the new assets test thresholds.
The first could be investing in lifetime annuities. "These can provide advantages under the income and assets test as they are classified as long-term income streams that are not subject to deeming and have a reducing asset value," said Elkins.
Re-contributing super from an older to younger spouse could be another effective strategy.
"For couples with one spouse under the pension age, withdrawing part of the older person's superannuation account and re-contributing it to the younger person's account may result in a reduction of assets, as superannuation is exempt in the accumulation phase until they reach pension age," Elkins said.
Upscaling the family home could be another strategy. "As the family home is exempt from the assets test, strategies such as buying a more expensive principal residence or home improvements may result in reduced assessable assets," she said.
"However, it is important to assess individual requirements as these strategies may also result in reduced liquidity and provide no extra income."
Pre-paying funeral expenses was another possibility. "Preparing for a funeral is not generally a topic of dinnertime conversation. However, pre-purchasing a burial plot, pre-paying funeral expenses or purchasing a funeral bond of up to $12,500 may assist in reducing assessable assets and maximise Age Pension entitlements."
Gifting money to children or grandchildren could also be considered. "Children and grandchildren are always happy to receive money. Ten thousand dollars per year, or $30,000 over five years, can be gifted without being subject to the assets test," Elkins said.
The assets test is one of two means tests used by Centrelink to determine a person's Age Pension eligibility, the second being an income test. The test that produces the lowest Age Pension payment, or zero, is then applied. The Pension changes were announced in the 2015 Federal Budget.
More from Morningstar
Nicki Bourlioufas is a Morningstar contributor.
© 2016 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.
Uncover winning investment ideas and strengthen your portfolio with a 4-week free trial to Premium:
- Your Money Weekly Newsletter
- Independent Fund Analyst Research
- Portfolio X-Ray
- Investment Picks