It’s a fresh new year, new challenges, new opportunities, and there’s one year to prepare clients for the changes to the Assets Test that will be applied from 1 January 2017, Vanissa na Ranong writes.
Budget 2015 introduced two key changes from 1 January 2017:
- An increase in the Asset Free Area to qualify for the full Age Pension (see table below); and
- A reduction in the Part Pension Assets Threshold, with a doubling of the pension reduction taper rate from $1.50 to $3.00 per fortnight for every $1,000 above the full pension assets amount.
An additional 50,000 Australians are expected to receive the full Age Pension, with another 120,000 part-pensioners expected to increase their age pension by an average of $30 per fortnight.
Based on budget projections, approximately 326,000 Australians will be subject to reduced or nil Age Pensions, with a greater number of Australians falling under the Assets Test.
Former pension recipients will be guaranteed eligibility for the Commonwealth Seniors Health Card (CSHC), and are exempt from normal CSHC income test.
Part Pension Impact – Assets Test
The table below illustrates the assets level where the taper rate adjustment reduces the part pension received, together with the current and 2017 cutoff points to be eligible to receive a part Age Pension. Ignoring the income test, in 2017:
- A single homeowner with assets between $294,500 and $547,000 will receive less pension than s/he currently receive in 2016;
- Couple homeowners with assessable assets above $823,000 will no longer receive the Age Pension.
Consequences – Assets Test Threshold Reduction and Doubling of the Taper Rate
The reduction in cash-flow will affect budgets, asset drawdown and aged care means tested fees. Non-homeowner pensioners may be affected to a greater extent, given higher potential asset levels.
Pre 1 January 2015 account based pensions will only retain grandfathering if clients continue to qualify for income support payments. If grandfathering is lost, it cannot be reinstated.
Example:
Grace and Edward are a home owner couple, with Centrelink Assessable Assets of $850,000, including $30,000 in personal assets, $270,000 invested in a 2008 account based pension, and $550,000 in other deemed investments (see table below).
Grace and Edward will no longer receive any pension from January 2017 and their previously grandfathered account based pension will be deemed.
While the asset free area has increased, the doubling of the taper rate has reduced Greg’s Age Pension.
Example:
Greg, a single non-homeowner, has $550,000 in assessable assets, including $50,000 in personal effects and $500,000 in deemed investments (see table below).
While the asset free area has increased, the doubling of the taper rate has reduced Greg’s Age Pension.
Assets Test Reduction Strategies
Clients facing a reduction in their Age Pension entitlements will require a reassessment of their financial plan, taking into account goals, longevity risk, ongoing funding requirements including investment strategy, and estate planning.
Case by case scenarios will differ. For example, the reduction in the aged care means tested fee may be more beneficial for the client.
Options that can be considered to reduce assessable assets between now and 1 January 2017 include:
- Additional superannuation contributions for a younger spouse not yet reaching Age Pension Age: Superannuation is sheltered until Age Pension Age. The increase in the Age Pension Age means that a spouse currently aged 63, would be sheltered until age 65, whereas a spouse aged 58, would be sheltered until age 67.
- Purchasing a funeral bond within allowable limits: Up to a maximum of two funeral bonds are exempted from the Assets Test, provided the owner does not have prepaid funeral expenses and is within the permitted funeral bond allowable limit, which is currently $12,250 (as at 1 July 2015). A joint bond is considered a single bond by Centrelink. Prepaid funeral expenses and burial plots are considered exempt assets.
- Gifting within allowable limits: Gifting of up to $10,000 per financial year is permitted, within the $30,000 cap over five years. A potential asset reduction of up to $20,000 would be possible if the client gifted $10,000 pre-June 2016, and $10,000 post June 2016;
- Bringing forward capital expenditure such as home renovations and holidays: It may be beneficial for the client to consider the costs of additional home fit out requirements for current and expected home care needs and/or potential later rental plans that may assist with aged care funding;
- Annuities (non- account based): In addition to fixed income benefits, the asset value of an annuity is reduced by the deductible amount/return of capital over the elapsed time period. For annuities paid more than once a year, the value is assessed on a six monthly basis.
Example
Sally is 65 years old and single. She purchases a 10-year annuity with a Residual Capital Value of $20,000 for $150,000. She receives a total payment of $18,337 per year. Monthly payments commence on 1 January. Her assessable asset from 1 January for the first six months will be:
$150,000 – [(($150,000 – $20,000) ÷ 10 years) × 0 years] = $150,000.
Her assessable asset from 30 June in that year will be:
$150,000 – [(($150,000 – $20,000) ÷ 10 years) × 0.5 years] = $143,500.
Source: Department of Social Security
- Refundable Accommodation Deposits for Aged Care: Refundable Accommodation Deposits are exempt from the Assets Test but are included as an assessable asset for Aged Care Means Testing.
Vanissa na Ranong is the technical services officer at Fiducian Financial Services.
