From 1st January, 10,000’s of retirees are affected through Age Pension changes. Learn how you can claw some back.
About 76% of Australian retirees rely on the Age Pension at the moment and the rules have changed.
For the worse!
Due to the Government’s budget deficits and the wave of baby boomers about to retire (almost 5,000 per week) and the fact that our life expectancy is predicted to increase, it’s not really surprising that the impact on retirees is going to be significant.
From 1st January, if you had assessable assets outside of your family home in excess of $450,000 you will have been affected. If you have assets over $816,000 you will have been the worst affected, losing as much as $14,122 of your annual pension benefit.
If you are affected, then you will be forced to rely more heavily on your limited retirement assets and this makes it even more important to invest prudently with what you have.
If you are wondering what constitutes an asset, we’ve dot pointed a list below
- Property (Place of residence is exempt)
- Cash in Bank
- Shares and other financial investments
- Superannuation balance (If a member of couple has reached age pension age)
- Pension account balance
- Certain types of life insurance policies
- Gifts given away
- Motor Vehicle, boats, contents
According to the Association of superannuation funds of Australia, couples need $59,318 p.a. to enjoy a comfortable retirement. It’s our experience that this is pretty typical if not light, when you take into consideration lump sum expenses that tend to crop up like upgrading the car or travelling for example.
To help understand the impact, we have created three examples that illustrate the impact for a part pensioner, before and after the changes:
Source: FPA Roadshow, Challenger Life presentation
What these tables show is the difference in pension different people are now entitled to, compared to what they were in the past. If you are someone with $900,000, you will now be more than 20% more reliant on your existing asset base to meet your income needs.
Given this, it’s simple to see the significance of these changes and the importance of planning to make the best of the circumstances, especially considering the uncertain global economy.
To be on the front foot there are things you can be doing that could be suitable to mitigate some of the impacts of these changes. At Yield we work through these options with our clients to try and find the solutions that meet their individual objectives, while remaining conscious of risk, to allow our retiree clients the opportunity to have less to worry about.
With this in mind, if you are one of the thousands of people that have been affected, it’s imperative to review the options available to help continue to meet your income goals.
As it stands, many people will be forced to consider a greater drawdown from their existing retirement reserves, like a superannuation pension for example, adding pressure to longevity of funds. One option that exists that could be appropriate to help cushion the impact of the changes is to include a strategic investment into a lifetime annuity.
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 withdrawal 75% on the initial amount invested (that is $45,000 each).
- 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.
As you can see, annuities are one powerful option that could be suitable to consider, as part of your overall retirement strategy. The combination of defensive investment attributes and potential Age Pension benefits can make them attractive to consider as part of a well rounded strategy.
Some other strategies we might consider for clients could include:
- Maximising younger spouse’s super
- Contribution splitting
- Review current investment strategy both for assets inside and outside super
- Principal home improvements
- Gifting (Early Inheritance)
- Funeral bonds / prepaid funeral expenses
We would welcome the opportunity to talk about any of these strategies and Age pension changes in greater detail. We can help you see how they might apply to your own position and pension entitlement.
It’s normal to want security and peace of mind that you can enjoy your retirement years, knowing your financial strategy is clear, so why wait! We are waiting to review your options with you. Click here
Written by James McFall – Financial Planner and founder of Yield Financial Planning.