Pension compression squeezing every dollar

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:

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.