2017 has meant a major change that affects recipients of benefits such as the aged pension. When a person receives the aged pension, their eligibility for that pension is affected by two tests: an income test and an assets test. Both tests dictate that, once income or assets pass a relatively low threshold, the amount of aged pension to which a person is entitled will fall.
In terms of income, to receive the full aged pension, income cannot exceed $164 per fortnight (if you are single) or $292 per fortnight (combined, for members of a couple). For every $1 of income above these amounts, the aged pension reduces by 50 cents. This means that no aged pension is payable once income exceeds $1,940 per fortnight (single) or $2,970 per fortnight (couple – although if you are a member of a couple and you need to live apart due to ill-health, this ‘upper threshold’ is higher).
In terms of assets, to receive the full aged pension your assets cannot exceed the following:
|in a couple, combined||$375,000||$575,000|
For every $1000 by which your assets exceed these limits, your aged pension is reduced by $3 per fortnight. The rate is slightly lower if you are a member of a couple and you need to live apart due to illness. This means that you will not receive any aged pension once your assets exceed:
|in a couple, combined||$821,500||$1,021,500|
|illness separated couple, combined||$967,500||$1,167,500|
A family home does not count towards the assets test. But superannuation benefits do.
The reduction by $3 for every $1000 of assets above the bottom threshold is known as the ‘taper rate.’ And the taper rate was doubled in 2017, from a previous level of $1.50 for every $1000 of assets above the bottom threshold. Doubling the taper rate has substantially reduced the upper threshold beyond which no pension is payable.
The reason for doubling the taper rate is obvious: the government wants to reduce the number of people who receive a ‘part pension’ (any pension less than the full amount). But the change slipped through unnoticed for many people, which is why we are writing about it now.
One of the (presumably unexpected) consequences of doubling the taper rate has been to seriously reduce the amount of cash available to people with more in superannuation. For example, a couple who own their own home and have $500,000 in their super fund (and no other significant assets) will potentially have a lot less cash available than a similar couple with only $400,000 in super. Here is how it looks in a table:
|Full annual pension||Super||Reduction in full pension||Annual aged pension amount|
Couple 2 receive $7,818 less in Centrelink benefits than couple 1. In order to make up the shortfall, they need to withdraw an additional $7,818 from their super fund. Doing this will simply give them the same spending money as couple 1. $7,818 is 7.82% of the additional $100,000 that couple 2 hold in superannuation.
Many commentators are suggesting that this is unfair. Having saved more during their working life, couple 2 now need to withdraw more of their superannuation just to enjoy the same disposable income as couple 1. Some people will point out that couple 2 are in control of more superannuation benefits, but some of this advantage is lost unless the extra benefits can generate total earnings of greater than 7.82%. Retirees often prefer a more conservative investment profiles, so a regular return of 8% or more is perhaps unlikely.
So, having saved more during their working life, couple 2 now find that they have to use up their extra savings at a rate much faster than those savings can generate investment returns, simply to maintain the same spending power as somebody who was less diligent in saving.
The situation can be even more frustrating if non-home assets other than super are considered. For example, we are aware of situations where a retired person owns an asset such as a vacant block of land worth $300,000. Because they own this block, their annual pension is reduced by $23,450 per year – even though the block is vacant and does not generate any income for them at all.
Some commentators have even gone so far as to say that there is little immediate value in owning non-home assets above a value of around $400,000 (for a couple). They are calling this the ‘superannuation sweet spot.’ These commentators worry that people with non-home assets above that amount will be encouraged either to spend the excess quickly (perhaps by having an absolutely sensational first year or two of retirement!) or to invest the excess into a family home. Unfortunately, simply giving away the excess amount, for example to assist adult children to purchase their own homes, won’t work because ‘excessive’ gifts are added back for the purposes of the assets test.
The good news is that effective planning can solve many of these issues. And it is worth doing, because an entitlement to the full aged pension is worth around $1 million in terms of assets (that is, you need around $1 million in assets to generate income equal to the full aged pension). Now that the taper rate has been doubled, effective planning becomes even more important.
There are things that can be done to maximise your eligibility for the aged pension – but these things should be done as early as possible. That’s why we encourage everyone who is either retired now or contemplating retirement in the next 10 years to contact us to discuss show that we can show you how to organise your finances to enjoy the best retirement possible.