CALL US  (07) 3487 0203

PROPLAN > The Sting in the Tail for Pensioners from Budget Night!

Budget night has passed and one of the major changes (that I will deal with here) is the change in the Assets test for Age Pensions that will come into effect from Jan 1 2017.

Simply put, a couple now can have $1,151,500 in assets outside of your home and get a part Aged pension. A single $775,500. Above these levels you receive nothing.

From Jan 1 2017 this will reduce to $823,000 for a couple and $547,000 for a single.

But, the threshold where you can get a full pension will rise to $375,000 (from $286,500 now) for a couple and $250,000 for a single (from $202,000 now). On the surface this looks good, but there is a big sting in this tail….

The Sting in the Tail!

Currently, for assets above the full pension asset thresholds, your pension entitlement reduces by $1.50 pf for every $1,000. But from Jan 1 2017, your pension will reduce by $3 pf for every $1,000 above the threshold of $375,000.

Law of Unintended Consequences

What this does is radically change what I call the “sweet spot” of what you should aim for in your super balance. If you are retiring in the next five years, I would now recommend that you would be better off aiming for $400-500,000 in super rather than a $1million balance!

See this example:

In this model you have TWICE the assets and yet only receive $4,000 (or 7%) more income.

Assets

Allocated Pension (Super)

$                480,000

 $             1,000,000

Cash in bank

$                  20,000

 $                  20,000

Cars/contents

$                  20,000

 $                  20,000

 $                520,000

 $             1,040,000

Pension eligibility

Asset Test Threshold

$                375,000

 $                375,000

Allocated Pension Drawdown rate of 7% and 6% #

$                  33,600

 $                  60,000

Aged Pension Payment

$                  22,407

 $                          -

Interest Income

$                       600

 $                       600

Total Income

$                  56,607

 $                  60,600

# With your own capital (and no pension support) the preservation of the capital via reduced drawdowns is more important, hence the 6% pension payment rate used

So the government may have cut their nose off to spite their face over this. They have (in trying to reign in welfare spending) discouraged people accruing larger balance in their super funds in one fell swoop.

You either want to aim for $400-500,000 or over $1.5million. As hideous as it is to say, in between these numbers does not give you a significantly better income result in retirement.

You can draw more Income from Smaller Balance Allocated Pensions!

And you could now support a greater drawdown rate of 7% if you are on the age pension and a balance of $480,000. This is because as you draw down any of your capital, your Aged Pension increase significantly.

Example,

  • You have a drawdown rate of 7% from your Allocated Pension (verse the normal 6% that we believe is more sustainable)
  • If on $480,000 you drawdown an extra $4,800 per year of your own capital, what you lose the next year is the earning capacity of 6% on this $4,800 or $288
  • But you get back 4.8 x $3pf in age pension or $374 over the year

So you have spent $4,800 and lost the income in future years that this can generate, but you get back more in the Aged pension! This will potentially cause more aggressive drawdown on capital in retirement, thus increasing burden on the Aged pension.

This is the point where my head starts to shake…!

These rule changes effectively mean smaller balance Allocated Pensions can now sustain higher rates of drawdown over time as the Aged Pension increase more than offsets the reduction of income your reduced capital generates.

So if you are between 50 and 60….

Aim for either $400-500,000 in super or if you are at that level now, aggressively try to get well over the $1million mark. If you are between 40 and 50….

 

Who knows where the rules will be sitting in 20 years’ time. DEFINITELY talk to us about starting to build assets in your own name outside of super.

These are very broad examples and each of your own circumstances will differ. We will discuss your individual position at review.

But the world of Retirement Saving is changing and will continue to do so. This is where our guidance will ensure you take the right steps over the years until you retire.

Return to Blog - Home