For the majority of Australia’s retirees, the Aged Pension provides income support as either a full or part pension. Eligibility is subject to both an income and assets test. These tests are set so that retirees draw down on their own assets to certain levels before they are entitled to any type of social security benefit.
The government has recently introduced changes to the Aged Pension asset test, which will take effect from the 1st of January 2017. The changes will increase the asset free threshold to receive a full aged pension, but also increase the taper rate at which the full aged pension is reduced. The asset free threshold will increase to:
- Home Owners – the new assets threshold allow up to $250,000 for singles and $375,000 for couples before a full aged pension is reduced.
- Non-Home Owners – the new assets threshold allow up to $450,000 for singles and $575,000 for couples before a full aged pension is reduced.
This change will deliver some aged pensioners with an increase in their part-pension entitlement or access to a full pension. For a single retiree who owns their own home, a full pension would begin to taper down with assessable assets over $209,000. As of 2017, this will increase to $250,000 of assessable assets, which will provide an increased aged pension for people in-between the new and old thresholds.
While it may firstly appear that the government is being generous, the harsh reality is delivered through the new taper rate. That is, for every $1,000 of assessable assets held over the allowable threshold, your aged pensions will reduce by $3 per fortnight. This is replacing the current taper rate of $1.50 per fortnight.
Part-pension payments will therefore be reduced at double the rate, starting from a slightly higher base asset limit. To highlight this, a couple who own their home could currently have assessable assets of $1,175,000 before all aged pension entitlements are lost. As of 2017, entitlements will be lost once assessable assets reach $814,250. This should be of concern for the majority of Australian pensioners who currently receive a part-pension. Unless you are at the lower end of the assets test, you should expect a likely reduction to your aged pension entitlement. This will force elderly Australians to deplete their often modest retirement assets at a faster rate than previously anticipated. With an ever increasing life expectancy, people are right to be concerned.
It is important to remember that your aged pension entitlements are also subject to an income test. This test has also changed in recent years. Account Based Pensions that were established after the 1st of January 2015 are now treated as financial assets and subject to deeming rules. However, pensions started before this date are subject to the income rules in-force at that time.
ASIC’s Money Smart website lists the annual income required for a single person to maintain a comfortable lifestyle as $42,893, and $58,922 for a couple. Any reduction in aged pension entitlements will increase the reliance on retirement assets to maintain sufficient income standards. Advice on replacing any lost income due to the new regulations will provide clarity and may also uncover other financial opportunities not being utilised. Therefore discussing your personal circumstances with a qualified adviser should be an important retirement planning step for all.
This article has been prepared by RSM Financial Services Australia Pty Ltd ABN 22 009 176 354, AFS Licence No. 238282. This article does not take into account your individual objectives, financial situation or needs. You should assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision.