A key component of retirement advice is assisting retirees to achieve their income goals. With approximately 76%[1] of all people age 65 or above receiving a Centrelink/DVA government pension, strategies to help retirees maximise their age pension benefits are important. This can help you save more for retirement.
From an advice perspective there has recently been a number of legislative changes to the means tests for the age pension that have required advisers to review existing income stream strategies and consider alternate options. These changes have included:
- The deeming of account based income streams (Account Based Pension), unless a grandfathering provision applies, from 1 January 2015; and
- The now legislated increase to the Assets Test thresholds and the Assets Test taper rate from 1 January 2017 — discussed further below.
Increase in The Assets Test Thresholds From 1 January 2017
This first change to the Assets Test relates to the threshold above which a pensioner’s entitlement will start to reduce. Subject to the Income Test, the increase in the Assets Test thresholds from 1 January 2017 (see Table 1) will enable a number of people to qualify for the full pension, rather than receive a part age pension.
Table 1: 1 January 2017 Asset Test Thresholds
Increase in the Taper Rate from 1 January 2017
The second change increased the taper rate from $1.50 to $3 per fortnight per $1,000 of assets over the asset test thresholds (Table 1). This means that from 1 January 2017 assets above the legislated asset test threshold (for example $375,000 for couple, homeowner) will reduce a retiree’s Age Pension entitlement (under the Assets Test) at a rate of $3 per fortnight ($78 per annum) per $1,000 of excess assets, instead of $1.50 as it is currently.
From an advice perspective, these changes mean that strategies to help a retiree reduce their assessable assets have become even more important considerations. For instance reducing assessable assets by $10,000 can have the effect of increasing a retiree’s Age Pension entitlement by $780 per annum where a client is asset-tested, equivalent to 7.8% per annum from 1 January 2017 (instead of $390 per annum, equivalent to 3.9% per annum, today).
Table 2 illustrates how these changes may impact a couple homeowner, and highlights that a homeowner couple with around $823,000 in assets may lose their age pension entirely, resulting in a drop of $14,467 in income. Similarly, a couple with $600,000 in assessable assets is likely to see reduction in their age pension benefit of approximately $5,792.
Table 2: Impact of 1 January 2017 Assets Test Changes for a couple/homeowner
Notes:
- Department of Families, Housing, Community Services and Indigenous Affairs; Department of Veteran Affairs; Challenger estimates. 2011 Census
- http://www.liberal.org.au/latest-news/2015/05/07/fairer-access-more-sustainable-pension, viewed 7 August 2015.
Advice Opportunities
Many people who see their Age Pension reduced (possibly to zero) from 1 January 2017 will be looking for advice to help them continue to meet their income goals — meaning in many cases people may consider a greater drawdown from their Account Based Pension, adding further pressure to any longevity and sequencing risk concerns. Therefore, to help cushion retirees from the impact of these changes, strategies involving a lifetime annuity can help.
The following example highlights how the technical benefits of a lifetime annuity can help a retiree reduce the impact of the 1 January changes and also enhance their annual cash flow through an increased age pension entitlement. The example is based on a homeowner couple both aged 65 with $30,000 in personal assets and $300,000 each in an account based pension (started in July 2015).
In summary, by each of them allocating 20% of their account based pension to a lifetime annuity, they have been able to:
- Receive guaranteed income of $3,000 p.a. each, fixed for life. On the 15th year anniversary (at the end of the guarantee period) they each have the option to withdraw 90% on the initial amount invested (that is $54,000 each) if they want.
- Increase the amount of age pension received from year 2. Over 15 years the overall increase in age pension is approximately $49,900.
- Reduce the impact the changes to the Centrelink Assets Test (effective from 1 January 2017) could have on their age pension benefit. That is the overall decrease in age pension (in year 2) is lower than it may have been if she did not include the lifetime annuity.
- Shorten the time taken for their age pension to return an amount similar to what they were receiving before the change. That is using the life-time annuity, it occurred by year 8 (new portfolio), rather than by year 12 (current).
- Enhance their overall cash flow through the combination of the annuity’s annual payment with the additional Age Pension entitlement. This is illustrated by the ‘Annuity cash flow with pension boost’ row.
Yield Financial Planning is Here to Help
At Yield, we understand these issues and can advise on how an annuity or a variety of other strategies could improve a retirement outcome.
For most retiree’s after all, they want security and peace of mind that they can enjoy their retirement years knowing their finance strategy is clear.
If you would like to find out more about the likely impact of these changes on entitlements and to explore strategies to help you save more for retirement, Yield is here to help.
