By Paul Rickard

Around 500,000 elderly Australians will shortly find out about the fate of their fortnightly pension payment. There will be about 170,000 winners and 326,000 losers as new asset test limits apply from 1 January 2017 to the receipt of the Government aged pension.

Originally announced back in May 2015, this is the implementation of the Coalition’s plan to reduce the dependence on the aged pension by more wealthy retirees. Passed with the support of the Greens, there are two changes to the assets test. There are no changes to the income test.

The first change

Firstly, the value of assets that a pensioner can hold before their full pension is reduced is being increased. This means that about 170,000 retirees will see a small increase in their regular fortnightly pension payment.

For example, the threshold for a home-owning couple increases from $296,500 to $375,000, meaning that couples who have assets (excluding the family home) which are valued between $296,500 and $375,00 will now get the full pension from 1 January (see Table 2).

Assets include property (outside the family home), shares, cash and term deposits, motor vehicles, household contents and most importantly, superannuation account balances.

Table 1 - Full Pension Thresholds - Singles

 

Table 2 - Full Pension Thresholds - Couples

The second change

The second change is to the taper rate, which is the rate at which pensions start to reduce. This is being increased from a rate of $1.50 per fortnight reduction in the pension to a rate of $3.00 per fortnight reduction in pension for every $1,000 of assets in excess of the threshold.

The net effect of these changes is that around 235,000 pensioners will see their pension reduced, while about 90,000 will cease getting any pension at all.

For example, consider a home-owning couple with combined assets of $500,000 (excluding the family home). The maximum pension for a home-owning couple is currently $1,322.40 per fortnight, or $34,382 pa. As their assets are above the threshold, they currently receive $1,017.15 per fortnight. From 1 January, with a higher threshold but also increased taper rate, their pension payment will fall to $947.40, a decrease of $69.75 per fortnight or $1,814 pa.

Approximately 90,000 pensioners will stop receiving any payment. Tables 3 and 4 show the maximum assets that a pensioner can have to receive a part pension. For a home-owning couple, the maximum amount of assets (excluding the family home) that a couple can own will reduce from $1,178,500 to $816,000.

Table 3 - Part Pension Thresholds - Singles

Table 4 - Part Pension Thresholds - Couples

The only “good news” for those who will lose their part pension is that they will continue to be entitled to a Commonwealth Senior’s Health Card, meaning that they will be eligible for Medicare bulk billing and less expensive pharmaceuticals.

If impacted, what can you do about it?

The answer is not a lot, apart from investing in the family home. Obviously, you can spend your wealth and reduce your net assets, but there are only so many overseas trips you can take. Replacing one asset with another doesn’t change the equation.

There are strict rules about gifting assets to another family member, which could see any gifts counted in the test as “deprived assets”, so this also doesn’t change the equation. Within the rules, you are allowed to gift up to $10,000 in a year and no more than $30,000 over the past five financial years.

A more obvious strategy is to invest in the family home – renovate, add an extra bedroom, build a pool, etc. This is attractive because it is not counted in the assets test, is free of any capital gains tax, and historically, has proven to be a good investment for many families.

Of course, you can over capitalise on any property. The old adage is still largely true - you want to own the worst house in the best street, rather than the best house in the worst street. And property is not a liquid asset, so if you need to find some cash to meet some unexpected expense, such as major hospital bills, you can’t sell one of the bedrooms.

The Government got this wrong

The problem with the new rules is that the taper rate is just too high. Because the pension reduces by $3.00 per fortnight for every $1,000 of assets, or $78 per year, this means that a pensioner would need to earn at least 7.8% pa after tax on their investment assets to be better off. Otherwise, they may as well jettison their assets and seek the safety and reliability of the pension.

While an after-tax return of 7.8% pa is not out of the question, it is pretty difficult, particularly if investing in defensive assets. This is why several pensioners will look at strategies such as investing in the family home to legally reduce assets. Moreover, people in their late fifties or early sixties who are more than five years out from pension age will think about gifting and other strategies to reduce assets, so they can actually receive the aged pension when eligible. In the long term, this will cost the taxpayer more.

The Government was badly advised on these changes. The taper rate shouldn’t have been lifted higher than $2.00 per fortnight, an effective investment rate of 5.2% pa.