Noel Whittaker 20 March 2016 Sunday Times
Changes to the age pension assets test take effect from 1 January, 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 will increase the pension for many less affluent recipients while reducing it, or even removing it from the wealthy ones.
The increase to the taper rate is substantial. Under the present rules the pension reduces by 3.9 percent for every $1000 above the assets test threshold – in January this rate to 7.8 percent.
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 will be around $547,000 for single home-owners, 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.
This will hit retirees with substantial assets hardest.
An age pensioner homeowner couple with $750,000 of assessable assets should currently be receiving about $620 a fortnight pension. Under the new rules, this would drop to $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 value non-investment assets at replacement value – they should be valued at second-hand value. This would put a figure of about $5,000 on most people’s furniture.
The new taper figures mean that every $10,000 of assessable assets has an impact of $780 a year on the pension. Overvaluing your car and furniture by $50,000 will cost you $3,900 a year in pension.
In contrast, spending $100,000 on travel and house renovations (thus reducing your assets) will increase your pension by $7,800 a year. That’s equivalent to a capital-guaranteed return of 7.8 percent a year on your money.
You can also reduce your assets by giving away part of your money, but seek advice before you do.
The Centrelink rules allow gifts of only $10,000 in a financial year, with a maximum of $30,000 over five years. So a would-be pensioner could give away $10,000 before June 30 and $10,000 just after, reducing their assessable assets by $20,000.
A couple could also invest $12,000 in funeral bonds, which are exempt.
Consider your situation carefully before deliberately spending or giving away 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 give away $50,000 could increase your pension under the new 7.8 percent taper rate is $3,900 a year. However, you will forgo interest of, say, 2 percent of $1,000 a year, meaning that the net benefit would be $2,900 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 Federal 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.
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.
[Note: also be aware of the Centrelink 5 year “deprivation” rules].