Be prepared for January 1, 2017

Changes to the age pension assets test take effect from January 1, 2017. Those who are income tested will not be affected.

By increasing the level at which the pension starts to reduce due to assets, and by steepening the taper rate itself, the government is managing to increase the pension for many less affluent recipients while reducing it, or even removing it, from the wealthier ones.

The increase to the taper rate is substantial.

Under the present rules the pension reduces by 3.9 per cent for every $1000 above the assets test threshold. In January this rate will rise to 7.8 per cent.

For a single homeowner, the base will rise from $205,500 to $250,000 and for a homeowner couple it will rise from $286,500 to $375,000. The upper cut-off points will be around $547,000 for single homeowners, and $823,000 for homeowner couples.

These are approximate numbers, as the changes will not take effect until January 2017. The thresholds will be increased on July 1 each year by the CPI.

These are approximate numbers, as the changes will not take effect until January 2017. The thresholds will be increased on July 1 each year by the CPI.

This will hit retirees with substantial assets the hardest.

An age pensioner homeowner couple with $750,000 of assessable assets should currently be receiving around $620 a fortnight pension. Under the new rules, this would drop to about $220 a fortnight – a loss of $10,400 a year.

That’s going to have a big impact on their budget.

Many people overvalue their assets. A common mistake is valuing non-investment assets at replacement value; they should be valued at second-hand value. This would put a figure of around $5000 on most people’s furniture.

The new taper figures mean that every $10,000 of assessable assets has an effect of $780 a year on the pension. Overvaluing your car and furniture by $50,000 will cost you $3900 a year in pension!

In contrast, spending $100,000 on travel and house renovations (thus reducing your assets) will increase your pension by $7800 a year. That’s equivalent to a capital-guaranteed return of 7.8 per cent per annum on your money.

You can also reduce your assets by gifting part of your money away, but seek advice before you do so.

Centrelink rules allow gifts of only $10,000 in a financial year, with a maximum of $30,000 over five years. Using these rules a would-be pensioner could gift away $10,000 before June 30 and $10,000 just after it, and so reduce their assessable assets by $20,000.

A couple could also invest $12,000 each in funeral bonds, which are exempt under the assets test.

Consider your situation carefully before deliberately spending or gifting large amounts of your assets. You will permanently lose access to the asset and it could take a long time to recoup the amount from extra pension.

For example, the most that spending or gifting $50,000 could increase your pension under the new 7.8 per cent taper rate is $3900 a year. However, you will forgo interest of, say 2 per cent or $1000 a year, meaning that the net benefit would be $2900 a year and it will take more than 17 years to recoup the $50,000 from extra pension.

In any event, the fact that the government has been forced to back away from the hard decisions in the forthcoming budget is a clear indication that it may be many years before Australia’s finances are restored. Further cuts to welfare must be expected.

A major task for retirees now is to take advice to make sure they are optimising the return they’re getting on their money. For starters, don’t let yourself be seduced by the banks into “investing” in so-called deeming accounts. Often they are paying less than the actual deeming rates.

You are likely to do better in one of the many good managed funds that are fairly low risk and designed to generate a reliable income. Some of these are paying up to 10 per cent per annum.

Interest rates are on the way down, and further pension tightening can be expected. The quicker you take control of your finances the better your situation will be as time passes.

Do you have a question? Send to Q&A, PO Box 130, Wyong NSW 2259 or email edit@thesenior.com.au
A selection of questions will be covered in this column. Personal replies will not be given.