Pension compression squeezing every dollar 14



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Time is running out to make plans for the upcoming changes to pension eligibility. From 1 January 2017, new thresholds will apply to the assets test for the aged pension. These generated a lot of publicity 12 months ago when they were announced, but since then I’ve seen many people simply procrastinate on making a decision about what’s best for them.

So who is affected? It gets complicated because there are different rules depending on whether you are single or a couple and if you own a home or not. Broadly speaking, people at the lower end of the scale will be able to have more assets before the pension reduces whereas couples with assets over the cut-off threshold of $823,000 stand to lose a lot.

Let’s have a look at the detail:

Your Situation Estimated Assets Test Threshold at 31 December 2016 Proposed Assets Test threshold at 1 January 2017
Single, homeowner $210,500 $250,000
Single, non-homeowner $363,000 $450,000
Couple, Homeowner $298,500 $375,000
Couple, Non-homeowner $451,000 $575,000

The real kicker is the change in the ‘taper rate’ that applies to part pensions. There is a range of assets where, while you don’t get the full pension, you do get a partial payment. Right now, the part-pension reduces by $1.50 per fortnight for every $1,000 of assets. That means the pension gradually reduces to zero.

But from January 1, 2017, rate at which a part pension reduces doubles from $1.50 per fortnight to $3.00 per fortnight. So for every $1000 of money you have saved over the minimum threshold, you lose three dollars a fortnight! Now that is what I call a ’pension compression’!

That’s equivalent to getting a rock solid, guaranteed after-tax rate of return of 7.8 per cent per annum on your savings. It’s enough to make a lot of people ask: why bother trying to support myself if it makes more sense to spend the money and rely on the pension?

This pension compression affects homeowners the most. For example, the Assets Test upper threshold for a single homeowner reduces by about 32 per cent compared with a single non-homeowner, which reduces by 22 per cent.

In my opinion, that’s another step in a broader trend where the government will be forced to reduce or eliminate concessions that apply to the family home. The day is not far away (for Centrelink purposes) when a dollar in the bank will be treated the same as a dollar tied up in your family home.

So what are your choices if you want to continue to receive a part pension after the new limits apply? Keep in mind you can’t just give it away: gifting rules apply that limit ‘helping’ the kids as an effective solution.

  • Improve your family home: Your home is treated the same whether it is worth $100,000 or $10 million. Therefore, money spent in improving your home can add value to it and is excluded from the assets test.
  • Seek higher returns from your investments. This will mean taking on additional investment risks, which may not suit your personal situation. In our current low interest rate environment, it’s tough to beat the equivalent rate of return that you will forgo by the changes to the assets test. But, it’s clear that simply putting your savings in Term Deposits is not the answer.
  • Consider a Lifetime or Term Annuity. The investments are designed to provide a secure income and they have the added benefit of having a concessional treatment for the assets test. Pleasingly, these are nowhere near as inflexible as they once were.

It’s essential that you get professional advice now while there is still time to make any changes you decide are appropriate for your circumstances. See your financial planner or get specific advice from Centrelink. You’ve worked hard to save this money, so avoid the pension compression.


Patrick Canion

Patrick Canion’s passion for financial planning reflects his strong views that all people are created equal and everyone is connected in some shape or form. As a prominent financial commentator and CEO of ipac Western Australia, Patrick is committed to providing the very best financial advice to people from all walks of life ensuring they are in control of their financial destiny.

  1. I still don’t Know if I am affected or not. Small pension from overseas and part pension from OZ. Not a property owner live in a retirement complex I had to buy into and will not get all my money back if I leave.

    1 REPLY
    • Hi Rob,
      The changes refer to the Assets Test – so if your total assets are worth less than the lower threshold in my article, there should be no change to your pension. But it can get complicated, so I recommend either calling Centrelink or talk to your financial adviser to confirm your exact position.

  2. We are on the full pension plus a small one from the U.K. not sure how other pensioners are going, but have found out my food shopping has gone up around $30.00 a week. But the pension has not increased since the Libs came in, as I really do not count the $1.00 a fortnight as a increase unless of course I have missed something
    The CPI really is not much to get excited about, Have also noticed nothing from either side about the age pension, has anyone else read or heard thanks for any info

  3. No wonder the govt is cutting age pension eligibility.

    What with a planned intake of 50,000 “refugees” per annum going straight onto welfare, they’re running out of other people’s money, and the “refugees” have higher priority until the nation becomes so overloaded with welfare recipients it will go broke like Greece!

  4. Shame on our Government and our Politicians. While they increase their own ‘salaries’ and ‘perks’, and continue to mismanage the countries finances by increasing our debt levels, they reward themselves for what could appear to be sheer financial incompetence.

    Decreasing the aged pension is tantamount to emotional and financial abuse of those who have worked and paid their dues to our society.

    I’ve not read one word about the shameful ‘financial rewards’ for illegal immigrants, or the expulsion of those responsible for desecrating ‘taxpayer’ funded establishments erected to house them. Nor have I read anywhere where the Government is cutting benefits for the unlimited breeding by unemployed, ungrateful, illegal immigrants taken in by the failed border protection by the Labour Government, who disrespect the Australian way of life. I’m referring to the need to fund unprecedented security within our nation.

    That some of the same politicians responsible for the failed border protection fiasco, think (Chris Bowen et al) that they deserve any place at all in our Parliament, says everything that needs to be said about self serving, pension depleting, mismanagement.

    4 REPLY
  5. I agree also, I am a pensioner and pay 600 f/n rent. The Govt tells us to tighten our belts, what about the pensions they get and have not retired yet and again allowed to get another job without losing their pensions. The people pay for their pensions and I feel that Pollies should not get a pension at all after serving short term in Govt. Also allowed to get another job at 200,000 a year and still get the pollies pension. If they are entitled to a pension then they should get the same as every other pensioner. HOW DO WE GET THIS HEARD BY OUR GOVT.

    1 REPLY
    • I totally agree Joy……im sick of seeing the inequality regarding this polly problem….where do they get off thinking they deserve to be set up for life after seeing their pure childish antics in parliament…my grandchildren have far more manners and honesty at 6 to 8 years old than most of these overpaid “…….heads” seem to possess……and there seems very little chance that any of them will own up to the issue.They are our SERVANTS…..we put them there after they told us all those lies about what they would do for us….sad isnt it.

  6. they don’t care the less we get , the quicker we die . so no pension pay out , if they could anybody that was 70 would be put down , just to save money , we have been paying a lavery on our tax since about 1943 to pay for our pensions .but our govments have spent in . but it’s or fault . John Burrows sorry about the spelling

  7. Tax breaks for big business while pensioners are pushed beyond their limits.
    You may want to think very carefully when you cast your vote in this federal election.
    Remember when the lib government last year talked about including our homes in the assets test? People were upset and rightly so. You think that proposal is off the table?
    IT IS NOT!
    A visit to Centrelink in March left me reeling.
    I asked about assets test, possible downsize and the impact. Aged Pension staff member advised about current assets test and the proposed new assets test and said it won’t matter as THE FAMILY HOME WILL BE INCLUDED IN THE ASSETS TEST FROM 1 JULY 2017. He went on to say Centrelink don’t have all the details yet but repeated to us three times that the family home will form part of the assets test from 1 July 2017.
    Don’t stick your head in the sand saying ‘or no he won’t do that’, don’t kid yourself. This government wants aged pension to be a welfare payment only. I felt sick to my stomach for days.
    Centrelink staff need to know how aged pension is assessed. Centrelink staff are not politicians wanting yiur vote. I have no doubt whatsoever that the information is correct.

    I approached Jenny Machlin shadow minister for disability and her previous portfolio included social and community sector telling her what Centrelink staff said.
    Jenny Macklin stated Labor will not include the family home in the assets test.
    Think very carefully about who you give your vote to. You could very well be voting for a party that will push you into a reverse mortgage just so you can afford to buy groceries.

  8. I agree with those above who ask you to think twice about who you vote for on polling day. The pension “compression” that becomes effective on 1st July 2017 is just the thin edge of the wedge and every year the coalition will chip away at pensioners. Before you put pen to paper on voting day, just ponder where that might leave you on 1st July 2018, 1st July 2019, 1st July 2020. Either side of the fence, all politicians are self serving, and none of them need the aged pension, so why should they care. With the number of retirees rapidly increasing in Australia, let’s hope that the aged get a real voice in this, and future elections.

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