How to make the pension work for you

On 1 January 2017, reductions to the assets test limits for the age pension were introduced, signalling a new age for Australian retirees.

These changes were largely a move to restrict pension entitlements Colonial First State senior technical manager Kim Guest said, with an estimated 330,000 Australians losing some or all of their pension.

“The Government called this ‘rebalancing the assets test’ because the changes increased the lower threshold to benefit Australians with lower levels of assets, and also increased the taper rate, which effectively reduced the pension entitlements of Australians with higher levels of assets,” Ms Guest said.

Effectively while Australians are able to hold greater levels of assets before their pension begins to reduce, it does so now at a much quicker rate.

“For a single homeowner, the lower threshold increased from $209,000 to $250,000, and for a couple homeowner, from $296,500 to $375,000. For a single non-homeowner, the lower threshold increased from $360,500 to 450,000, and for a couple non-homeowner, from $448,000 to $575,000,” Ms Guest explained.

Under the new rules, retirees lose $3 per fortnight of the age pension for every $1,000 they have in assets above those thresholds. This is double the $1.50 per fortnight reduction that previously applied.

“As a result, the upper threshold, being the level of assets at which a person is not entitled to an age pension, has been reduced substantially,” Ms Guest said.

Accordingly, those who found themselves on the upper end of the assets scale likely received significant reductions in their entitlement.

“For a single homeowner, the most they could lose was around $9,500, and for a couple homeowner around $13,500, which were significant reductions when compared with much smaller increases for people with lower levels of assets,” she said.

A sudden decline in fortnightly income means the liquidity of wealthier Australians in particular may be looking precarious, Colonial First State executive manager Craig Day says.

“Retirees that have accumulated that level of assets inside super, depending on what other assessable assets they have, they’re the kind of people who may be most impacted by these changes,” Mr Day said.

“They have to think, do they need to adjust their spending habits and compromise their quality of life or do they look at increasing the drawdown from their account-based pensions which may be funded from their SMSF which will also require them to look at their asset mix and their investment strategy,” Mr Day said.

However changes to the pension test are not necessarily negative for those who know how to play within the new rules and structure their assets accordingly.

Minimising assessable assets

First and foremost, Australians must appreciate how the asset test works in order to understand how to reduce its impact on them.

CBA executive general manager Linda Elkins says there are several ways you may minimise your assets to be assessed, and in doing so, maximise your entitlement.

For retiree couples, the most common way to do this can be found in their superannuation fund.

“For couples with one spouse under the pension age, withdrawing part of the older person’s superannuation account and re-contributing it to the younger person’s account may result in a reduction of assets, as superannuation is exempt in the accumulation phase until they reach pension age,” Ms Elkins said.

The other major exemption is conveniently the largest asset most Australians own- the family home. By moving some of your wealth into your home, you can quickly and effectively slash the value of your assessment.

“Strategies such as buying a more expensive principal residence or home improvements may result in reduced assessable assets,” Ms Elkins said.

“However, it is important to assess individual requirements as these strategies may also result in reduced liquidity and provide no extra income.”

Alternatively Australians are able to gift up to $30,000 over five years to children or grandchildren without being subject to the assets test. Equally, pre-paid funeral expenses, including burial plots or funeral bonds, of up to $12,500 are exempt.

Fortune favours the brave

Once you have minimised the amount of assets available for assessment, the other major consideration is how your wealth is structured.

One of the most significant changes was the asset test taper rate doubling, meaning that as your assets reduce, the age pension provides the equivalent of 7.8 per cent pension increase value. So for example, if the value of your assets were to fall by $10,000, your pension would increase by $780 per year.

With Australian interest rates likely to remain at historic lows, a pension returning 7.8 per cent is certainly nothing to be scoffed at. Moreover, such a change actually rewards pensioners willing to take on additional risk, Shadforth Financial Group principal Phillip Gillard says.

“One positive to flow from the changes is that you can take more risk with your investments by increasing your allocation to growth assets, such as shares and property,” Mr Gillard said.

“This could reward you over time as your long-term return could be higher,” he added.

By moving into a more aggressive growth strategy, retirees can be compensated by the pension if their additional risk exposure sees their wealth take a hit. Alternatively, if such a strategy bears fruit, retirees may find themselves with a significant windfall.

However a pivot to growth assets doesn’t mean you have to get reckless and abandon defensive assets entirely.

“If you are currently in a defensive investment position, you should consider shares carefully [and know that] you need a high level of diversification and still need sufficient funds in low-risk assets, like cash and term deposits, to use when and if your growth assets fall,” Mr Gillard said.

In reviewing your situation, and ensuring your portfolio is sufficiently liquid, you should be able to ride out any associated volatility.

“Holding seven years’ worth of living expenses, or 10 years if you are very conservative, in low-risk assets would substantially reduce the need to sell your shares before they recover their value,” he added.

Mr Gillard said Shadforth’s research indicated Australians should consider investing in some growth assets because they could ultimately end up in a better position than if they were only invested in defensive assets.

Conclusion

Ultimately those who are familiar with both the new rules and their own situation will be the best equipped to get the best deal possible.

“These strategies should always be carefully considered in light of the person or couple’s financial goals, as they may not be in their financial best interests,” Ms Guest advised.

Given the relatively new changes and the likelihood that these won’t be the last set of reforms, it’s vital you regularly review your situation, assets, and pension entitlement to ensure you’re receiving the correct amount. In doing so, you can guarantee you receive all that you are entitled to, which in retirement can make all the difference.

How to make the pension work for you

Jack Derwin

Last Updated: 18 December 2019 Published: 01 March 2017