1 Jan 2017 pension shift sparks asset trimming

retiree newspaper228 Dec 2015  By Joanna Mather  Australian Financial Review

Renovating the family home, taking holidays or giving money to children are among the strategies retirees can use to get around a tighter pension asset test starting on January 1, 2017, financial planners say.

Other options include moving savings into a spouse’s superannuation fund, gifting money to children or grandchildren, purchasing pre-paid funerals and spending on holidays.

Across the country, financial planners are telling clients how to reduce their assets to stay under the new thresholds for pension eligibility.

“Clearly the change to the assets test will adversely affect a large number of retirees and create a significant incentive to reduce assessable assets,” one firm on the NSW central coast tells clients.

“Assets can also be reduced by gifting (care required here) or through spending on travel and lifestyle.”

“Do your assets need trimming down?” wealth management giant AMP asks on its website. “A financial advisor can help you with asset reducing strategies.”

The changes – agreed to by the Greens to save the federal budget $2.4 billion over four years – were in response to criticism that some retirees with more than a million dollars in assets are still eligible to receive a part pension.

The government is lifting the assets-test free limit for homeowner couples from $286,500 to $375,000 but withdrawing the pension at a much faster rate than before.

The pension will be reduced by $3 per fortnight for every $1000 above the asset-free threshold, up from $1.50 at the moment.

As a result, 91,300 wealthier [ie hard saving] retirees will lose the part pension, while another 236,000 part pensioners will have their payments trimmed. However, 170,000 pensioners with low and modest levels of assets will have their pension increased by around $30 a fortnight.

Not everybody appreciates the blatant advice being shelled out by financial planners.

ISA chief executive David Whiteley said the government should be encouraging people to downsize and sensibly draw down on their assets during retirement.

“The effects of this policy change, which was rushed through the Senate with undue haste, now appear to be sinking in – it should ring alarm bells,” he said.

“We doubt it was the intention of the policy to drive this sort of behaviour, but frankly it was foreseeable.

“A punitive asset test taper has the same effect as a punitive tax rate – it distorts behaviour as people find every which way to avoid it.”

At the top end of pension recipients there will be losers. The part pension will cut out for a couple with assets of $823,000 on top of their family home. It currently cuts out at $1.1 million.

The Australian National University’s Tax and Transfer Policy Institute has accused the government to imposing a wealth tax on middle Australia while letting the really rich off scott free.

Colonial First State has issued detailed advice on strategies to legally reduce assessable assets for part pensioners.

These include maximising the super balance of a spouse while they are under the age pension age, improving or purchasing a more expensive principal home and gifting within allowable limits. The primary residence is not included in eligibility for the pension, nor is it subject to capital gains tax upon sale.

Colonial First State senior technical manager Tim Sanderson gives the example of 65-year-old retiree he calls Cheryl who has the option of spending $50,000 from her super to fund renovations on her home.

“If Cheryl takes no action, she stands to lose $4218 [a year] in pension as a result of the new assets test changes,” he wrote in a briefing. But if she spends $50,000 on renovations, she benefits to the tune of $1950 as well as increasing the value of her home.

“Where the capital spend will be fully reflected in the value of the principal home, this strategy (which appears ineffective under the current rules) becomes a valid strategy under the 1 January 2017 rules.”

Edited from original article here

One thought on “1 Jan 2017 pension shift sparks asset trimming

  1. Pingback: Book Review: “Welfare of Nations” by James Bartholomew – Australia’s Age Pension system exposed | Roxburgh Securities

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