Having too many assets may mean less pension

Back on 12 May 2015, the Treasurer sent a shiver down the spine of many age pensioners by announcing in the Budget there would be changes to the way the assets test works for pensioners. Just to recap:

  • The changes will come into force from 1 January 2017 (in just under 18 month’s time);
  • The legislation introducing these changes has been passed by the Parliament (so it is now “law”);
  • Some pensioners will be better off as a result of the changes (approximately 170,000 will receive an increased pension);
  • However, approximately 320,000 pensioners will be worse off (with an estimated 90,000 losing their pension entitlements altogether); and
  • Pensioners who lose their age pension completely will automatically receive a Commonwealth Seniors Health Card.

The changes announced in the budget were twofold:

The first change announced was a proposal to increase the amount of assets a person may have before their pension starts to reduce. For example, the current asset-free limit for homeowners is $205,500 for a single person, and $291,500 for a couple. These limits are to increase to $250,000 and $375,000 for singles and couples, respectively. People who don’t own a home have a higher asset-free limit. By increasing the asset-free limit, more people will qualify for an increased pension.

The second change related to a proposal to increase the “taper rate” from $1.50 per $1,000, to $3.00 per $1,000. The taper rate is the amount by which a pension reduces each fortnight, for every thousand dollars of assets that exceed the asset free amount.

A change in the taper rate will see the current upper limit under the assets test, the point at which a pension ceases to be payable, reducing.

As a result in the change to the taper rate, the assets test upper limit (the level of assets a person can have before their pension cuts out) will reduce from $779,000 to $547,000 for a home-owning single pensioner, and from $1,156,500 to $823,000 for a home-owner couple.

For non-homeowners the limits are higher. A non-home owning single can currently have $928,000 in assets before they loose their entitlement to a pension. From 1 January 2017, this will reduce to $747,000. The asset cut-off for a non-homeowner couple is currently $1,305,500, reducing to $1,023,000 in January 2017.

My colleague Mark recently wrote about an article that occurred in the Australian Financial Review on 28 May 2015. The article told the story of a women who, as a result of the proposed budget changes, had withdrawn $25,000 from her super to spend on an Alaskan cruise. According to the article, she would minimise the impact on her age pension by spending this money. We believe the article contained significant errors.

The important message in relation to the age pension changes is that there will be some winners, and there will be some losers.

If you think you may be affected, there are a couple of things you need to consider:

  1. 85% of people who receive less than the full age pension are assessed under the income test, rather than the assets test;
  2. Don’t do anything without having all the facts;
  3. Seek good quality professional advice – don’t believe everything you read in the papers, hear on the radio, or see on current affairs programs;
  4. Everyone’s situation is different and what applies to one person may not apply to you;
  5. Don’t rush off and buy an Alaskan cruise, or spend money unnecessarily, just to save your pension, unless of course taking an Alaskan cruise is on your list of things to do;
  6. The changes do not apply until January 2017, so there is no need to rush your decisions.
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