Earlier this year, legislation to tighten the Age Pension Asset Test passed through the senate.
At first glance, it would appear the legislation to tighten the asset test for pensions is a reasonable compromise by increasing the minimum threshold of investment assets you can hold before reducing the Aged Pension. Consequently reducing the maximum threshold of investment assets you can hold before the Aged Pension cuts off. However upon further analysis it would appear part-pensioners and individuals planning for retirement may have reasons to be concerned.
Firstly, a recap of the changes:
The minimum asset test thresholds will increase and the maximum thresholds will decrease as per the following table.
|Description||New Minimum Threshold||New Maximum|
|Single, Homeowner||Up to $250,000||Less than $547,000|
|Couple, Homeowners||Up to $375,000||Less than $823,000|
|Single, Non-Homeowner||Up to $450,000||Less than $747,000|
|Couple, Non-Homeowners||Up to $575,000||Less than $1,023,000|
Currently, the asset test thresholds for the Age Pension (as at 20th of September 2015) is:
|Description||Minimum Threshold||Maximum Threshold|
|Single, Homeowner||Up to $205,500||Less than $783,500|
|Couple, Homeowners||Up to $291,500||Less than $1,163,00|
|Single, Non-Homeowner||Up to $354,500||Less than $932,500|
|Couple, Non-Homeowners||Up to $440,500||Less than $1,312,000|
- The taper rate (the rate at which the Age Pension is reduced) will increase from $1.50 to $3 per $1,000 of assets over the minimum threshold.
- The current policy for pension indexation will remain and previously proposed deeming threshold reductions to $30,000 (singles) and $50,000 (couples) from September 2017 will not proceed.
What does this mean for pensioners?
For a home-owning couple, from January 1, 2017 the new maximum threshold will reduce from approximately $1.15 million to $823,000. Likewise, for a single home-owner the new maximum threshold will reduce from $775,500 to $547,000. The good news is that minimum thresholds will increase.
However, it is the change in the taper rate that is most likely to affect pension payments, particularly for those entering retirement over the next 10 to 15 years. At the moment, $1.50 of a fortnightly pension is lost for each additional $1,000 of assets above the minimum threshold. From 1 January 2017, the taper rate will be $3 per $1,000 of excess assets. As it is the taper rate which governs how much pension payment is lost for every additional $1,000 of assets above the minimum threshold, it is this “devil in the detail” that will create anxiety for many retirees and pre-retirees.
Using the government’s new thresholds:
- a retired home-owning couple with $600,000 in deemed assets would receive almost $5,400 a year less in age pension
- a single home-owning retiree with $350,000 in deemed assets would receive approximately $2,000 a year less in age pension
It goes without saying our retirees in the above scenarios will need to draw additional funds from other sources in retirement if they wish to retain the same income they enjoyed prior to the changes. Logically, this will be from their superannuation funds in the first instance. If they have planned their strategy based on saving a specific amount of capital at retirement to fund a certain income level throughout retirement, this strategy will now need to be reviewed. The longevity of their capital will be under pressure now due to the loss in Age Pension income.
It is important to note that not everyone will be negatively affected by the pension changes. For some, the outcome will be better and for some, there will be no change. However, for many Australians who lie in the ‘middle ground’ in terms of assessable assets these individuals and/or couples will likely see a reduction in pension benefits.