Managing retiree income and cashflow ahead of the pension changes

Around 500,000 retirees and pre-retirees will be impacted by pending changes to the Age Pension Assets Test*. It’s an opportune time for advisers to review their clients’ circumstances to ensure their retirement income strategy continues to maximise social security, meet their cashflow needs and manage longevity risk.

Many retirees who currently qualify for a part pension stand to either lose their benefits or see them dramatically reduced, under significant changes to the Age Pension assets test thresholds and taper rate, that come into effect on January 1, 2017.

The changes, which were originally flagged in the 2015 Federal Budget, will impact the retirement plans of many retirees and pre-retirees, presenting an opportunity for advisers to educate their clients about the changes, review their situation, assess any personal implications and explain the different options to help them protect and maximise their retirement income.

There are four main strategies available which are examined later in this article.  One, or a combination of strategies, may be suitable for retirees seeking to lower their assessable assets. 

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What's changing?

There are two major changes from January 1, 2017 which may affect a person’s Age Pension eligibility.

Firstly, the “asset free areas” for both homeowners and non-homeowners will increase.

This means retirees will be able to own more assets such as property (excluding the family home), cars, superannuation, shares and household contents, before their pension reduces under the assets test.

For example, from January 1, a homeowner couple can own assets up to $375,000 on top of their home and still qualify for the full Age Pension. Currently, they can only hold assets valued at up to $296,500.

For a small number of retirees, this change may lead to higher pension entitlements.

The second change will see the assets test taper rate double and Age Pension entitlements reduce at a faster pace once assessable assets exceed the new thresholds. From January 1 retirees will lose $3 per fortnight of the age pension for every $1,000 they have above the threshold.

It’s estimated that hundreds of thousands of retirees will be worse off under the new rules.

The following tables allow you to look up the rate of annual Age Pension payable for various levels of assets under the current rules (as at 20 September 2016) and the new assets test rules (as at January 1 2017).

Assumes assets are financial investments subject to deeming

Assumes assets are financial investments subject to deeming

What are the implications?

As demonstrated in the tables above, part pensioners with assessable assets above $500,000 for homeowner couples and $300,000 for single homeowners stand to lose the most.

For example, homeowner couples aged 65 with combined assessable assets of up to $1,178,500 currently qualify for a part Age Pension but the new cut-off level will reduce to $816,000.

From January 1, homeowner couples with assessable assets of $816,000 or more will see their benefits cut from around $13,000 per annum to nil.

Similarly, the new cut-off level for single homeowners will be $542,500 in assessable assets, down from $793,750. From January 1, single homeowners with $550,000 in assessable assets will see their pension cut from $9,763 per annum to nil.

Retirees who lose their pension entitlement on 1 January 2017 will automatically receive a non-income tested Low Income Health Care Card or Commonwealth Seniors Health Card (for those above Age Pension age).

For retirees negatively affected by the changes, their income will be reduced which could severely impact their standard of living, peace of mind and enjoyment in retirement.

However, there are several assets test reduction strategies that advisers can employ to lower their clients’ assessable assets in order to reduce the impact of the changes, maximise their age pension benefits, and improve their overall income and cashflow position.

 These include:

1. Recommending investment in a lifetime annuity
2. Re-contributing part of an older spouse’s super to a younger spouse if they are under Age Pension age
3. Purchasing non-assessable assets such as buying a more expensive home, making home renovations, buying a funeral bond or prepaying funeral expenses
4. Gifting to family within limits.

Each strategy has certain advantages, limitations and risks.

For example, re-contributing to a spouse’s super may only be a viable option for those who have a spouse under Age Pension age, as superannuation in accumulation phase is exempt from the assets test until they reach preservation age.

Upgrading to a more expensive home or embarking on extensive renovations is likely to result in reduced liquidity and provide no extra income, while gifting is only permissible up to $10,000 per financial year or $30,000 over a rolling five-year period.

Gifts exceeding these limits are assessed as an asset and deemed for income test purposes.  

Minimising the blow

Investing in a lifetime annuity is set to become an increasingly popular option for retirees who want to reduce their assessable assets; build a stable, regular retirement income stream; and ensure they don’t run out of money.

Lifetime annuities can provide social security advantages under both the assets and income tests because they are considered long-term income streams that are not subject to deeming and have a reducing asset value.

Under Centrelink’s assets test, the purchase price of a lifetime annuity reduces by half the deduction amount every six months (assuming there is no residual capital value). As a result, retirees may qualify for greater benefits over time.

Furthermore, the asset value is reduced to nil once the annuitant, or reversionary beneficiary, reaches life expectancy age.

With only two months left before changes to the Age Pension assets test come into play, retirees and pre-retirees will be looking to their advisers for certainty and guidance around how to navigate the new rules.

A good place for advisers to start may be to focus on those who will be heavily impacted, namely retirees with between $600,000 and $900,000 in assessable assets. Their cashflow will likely be significantly reduced, meaning one or a combination of the above strategies may be appropriate to reduce the blow.

George Lytas is head of annuities at CommInsure.

Adviser use only

Source

This information was prepared by CommInsure, a registered business name of The Colonial Mutual Life Assurance Society Limited ABN 12 004 021 809 AFSL 235035 (CMLA) a wholly owned but non-guaranteed subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945.