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Changes to the Assets Test for Age Pensions came into effect on January 1 – Ensure Centrelink have your correct numbers

 

Last years Federal Budget included a number of significant changes to means testing for the Centrelink age pension, these changes came into effect 1 January 2017.

Over the last couple of months Centrelink began communicating with those that will be affected. As a consequence of this communication we have had a number of clients report that their asset numbers seem to be inflated, which if left uncorrected will result in a lower pension entitlement under the new rules.

Should this occur, it is best to assume:

  • that you will receive less in pension benefits until the true value of your asset pool is established
  • that a refund will not be provided.

What you need to do

You must ensure Centrelink has the correct information with regard to your current asset portfolio.

If you have a My Gov account you can check the asset values Centrelink currently hold against your records by visiting https://www.humanservices.gov.au/customer/services/centrelink/age-pension

Alternatively if you are at all concerned about how the changes to the age pension will affect you, please contact a Finsec Partners adviser to discuss in more detail.
Information regarding the new legislation is summarised below.

Who is affected by the changes to the assets test for Age Pensions?

Australians over the age of 65, currently receiving a part or full age pension, will incur a $3 reduction per fortnight (currently $1.50 per fortnight) to their pension for every $1000 in assets owned above the ‘assets test free’ threshold.
The new thresholds are dependent on whether you are single or a couple and rent or own your own home. The below table outlines the new asset threshold limits (the number at which the pension starts reducing) for each scenario.

What assets are included in the threshold?

The market value of most assets are considered when calculating your age pension. This includes but is not limited to:

  • Property (excluding your home)
  • Motor vehicles, boats and caravans
  • Financial investments
  • Superannuation if you’re over age pension age
  • Business assets
  • Household contents and personal effects

Please note: there are different rules for contributions paid to live in a retirement village. Some farm related assets, funeral plans and carer payments may also be exempt.

Morrison in the Middle: Changes to Age Pension Eligibility

Nothing has highlighted the unintended consequences of tinkering with retirement income more than last month’s federal budget.

The fiscally and politically potent combination of age pensions and superannuation is always complex, however this budget has left many financial analysts scratching their heads.

The proposed changes to the Age Pension eligibility criteria, put forward by Minister for Social Services Scott Morrison, will have major ramifications for retirees who had carefully planned for their financial future.

While the tighter rules are designed to stop wealthy retirees living off the government, it’s likely they could have the perverse effect of encouraging pensioners to blow their savings just so they can continue to receive benefits. The formula just doesn’t add up.

A look at the numbers

Meet John and Jan, who are retired. They own their family home and have $375,000 in superannuation assets. Under the proposed new legislation, they are eligible for the full age pension. Like most retirees they will invest in “safe” investments and expect to make a modest return of around 3% on their super. This return, combined with their pension entitlements should deliver an annual income of nearly $45,000, whilst maintaining their capital. In theory they could choose to supplement this income by drawing down on their super.

Retired couple number 2, William and Sally who also own their family home have worked hard at saving for retirement and have a superannuation balance of just over $800,000. A figure they were told would deliver them the ‘comfortable retirement’ they desired (as defined by the Association of Superannuation Funds of Australia and published on the MoneySmart website). They have spent the last decade actively planning their ‘golden years’ and factored in an annual income of around $60,000.

Like many others William and Sally have been assuming the age pension would complement their income from the outset (roughly $15,000 out of the $60,000) and gradually increase over time to make up a much larger proportion in their latter years. The balance would consist of around $25,000 in super earnings (based on the same 3% earning rate as John and Jan) and an annual drawdown of $20,000 on their super balance.

But on budget night, the government turned William and Sally’s plans on their head. Under the proposed new rules, William and Sally are no longer eligible for any government pension at all. In the proposed new environment the “comfortable” retirement they were promised will now cost a further $15,000, increasing their super drawings to $35,000 per year.

Put in perspective John and Jan (receiving a full pension) could choose to live on a similar income by drawing only $15,000 from their super per year.

It’s estimated that William and Sally would be among 300,000 full or part pensioners set to receive less if the government changes are legislated. According to analysis by Rice Warner, half of all people leaving the workforce within the next decade will be affected. For these middle retirees, the obvious alternative is to spend more assets more quickly in order to qualify for the part or full pension … for a nation facing a ‘budget crisis’ this seems contradictory.

The direction of the overall policy indicates a greater expectation that Australians will plan and provide for more of their own retirement in the future. But unfortunately Mr Morrison’s formula will squeeze middle retirees the most.

There has already been a substantial amount of commentary around the inequality of these changes, a sentiment it would seem Bill Shorten and the Labor party share. On Tuesday Labor attempted to block the proposal only to have the move foiled by the Greens who announced their support, conditional on the Government considering changes to superannuation in its Tax White Paper.

Let’s hope that good sense prevails with an outcome that considers the reality of the numbers, the retrospective impact of the proposal and acknowledges that, for most retirees, income from super and from the pension is totally intertwined.

At it’s core the strategy of the government is not without merit but to introduce the changes retrospectively undermines the integrity of the plans laid out by current and soon to be retirees. If the changes were to be introduced for people retiring after 2025, plans could be amended accordingly.

We will keep you updated but expect this one will continue to be a “watch this space”…

Changes to Centrelink assessments mean less age pension!

 

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Concessionally assessed, deeming provisions… unless you are a trained financial expert, determining how the changes to Centrelink assessment rules will affect your individual circumstances can be confusing. The good news is, it doesn’t have to be and there are a number of ways to minimise the impact. This particular legislation however, does come with a deadline (January 1, 2015) so it is critical that you seek advice regarding your options sooner rather than later.

The changes: The rules in regards to how your pension is assessed for Centrelink entitlements changes on January 1, 2015. These changes became law on 31st March, 2014. Going forward, normal Centrelink deeming rules will now be applied to superannuation account-based income streams. Currently these income streams are concessionally assessed for Centrelink purposes, which results in higher entitlements. According to the rules, indefinite grandfathering will apply to any superannuation pensions that are in place by January 1, 2015.

Who will be affected?

  • Retirees who change their superannuation product on or after January 1st, 2015 will be subject to the new deeming rules.
  • Retirees who choose to commute their superannuation pension on or after January 1st, 2015 will be subject to the new deeming rules.
  • Anyone looking to claim or getting close to qualifying for a pension, needs to do so before January 1st, 2015. If they are not receiving the pension by this time their super pension will be subject to the new deeming rules.

How will it affect you?

Currently, retirees whose Centrelink entitlements are affected by the income test, may choose to optimise their entitlements by investing in non-deemed investments, such as an account-based pension. An investment into an account-based pension entitles you with a non-assessable amount to reduce your chosen income payment. This often results in a much lower income assessment and, therefore, a potentially higher Centrelink entitlement.

From January 1st, 2015 new account- based superannuation pensions (started on or after this date), will be subject to deeming (applied when assessing a person’s eligibility against the Age Pension Income Test). This investment will be treated for example like a share or term deposit and may no longer be ‘income test friendly’.
This may result in a much higher income assessment and, therefore, a potentially lower Centrelink entitlement.
Those who may be most affected by the new deeming rules are individuals with additional income sources such as Government superannuation pensions (including pensions from overseas).

What to do:

The new rules will have a number of implications for many Australian’s and their retirement strategies. A good financial planner will be able to provide clarity around the issues and show you a range of likely outcomes. The important thing is to seek advice and plan now!

Reducing Aged Care Fees with Investment Bonds

As we get older it is a safe assumption that many of us will need to access aged care services. Like any other service we should also expect to pay for it, but what sort of fees should we expect and what strategies should we be thinking about to minimise them?

Aged Care Fees – At A Glance: 

If you need to move to residential aged care you can expect to pay several types of fees:

  • Entry fees – this is to pay for the right to live in the facility and is asset based
  • Daily care fees – pays for your care including food, cleaning services, nursing staff, electricity
  • Extra service fees – payable for higher levels of accommodation or services if the facility is accredited as extra-service.

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Note: The above chart shows fees current to 31 Dec 2013

The basic daily care fee is 85% of the single rate of age pension to ensure everyone can afford to pay these fees. If you have higher levels of income you will pay a higher fee. This extra income-tested fee could be up to $72.48 per day (current to 31 Dec 2013).

Planning Strategies

With good advice and careful planning, there are strategies you can implement to minimise aged care fees and potentially maximise age pension.
For example if you can reduce assessable income (using Centrelink rules) you can also reduce the income-tested daily care fee.

Some strategies include:

  • Pay a higher accommodation Bond
  • Rent and keep the family home
  • Gifting (limited to $10,000 per financial year or $30,000 in any five year period)
  • Funeral bonds (invest up to $11,700) or prepay funeral expenses
  • Investing in an investment bond through a family trust.

Investment bonds and the family trust

Family discretionary trusts can be used to hold assets for a number of reasons. This might be for management of family finances or taxation planning. If combined with an investment bond it can also be used to reduce assessable income for Centrelink and aged care purposes.

Under this strategy, a family trust is set up and money is transferred into the trust. The trust then uses this money to buy an investment bond.

Money held in a family trust is not assessed under the normal deeming rules for Centrelink/aged care purposes. Instead, the assessable income is the same as taxable income. This is where an investment bond can be handy. Earnings on an investment bond are taxed in the hands of the product provider, not the investor. So as long as no withdrawals are made (in the first 10 years), there is no taxable income to the trust. And if there is no taxable income, there is no assessable income.

If there is no assessable income, the daily care fees in aged care can be minimised and your age pension may be increased if you are on a lower pension due to the income test.

Is it always a good idea?

Everyone has a unique situation and the strategy can work differently for different people. The investment bond/discretionary trust strategy works better for people moving into aged care who:

  • Are self-funded and wish to reduce taxable income to retain the Commonwealth Seniors Health Card
  • Have high levels of Centrelink assessed income (for example from a super pension)
  • Are paying an income-tested fee.

As with many strategies, there is an upside and a downside. You should always seek advice to determine if this strategy works for you.

This information does not consider your personal circumstances and is general advice only. Before making any decisions based on this information you should consider its appropriateness taking into account your objectives, financial situation and needs. 

Copyright © KeyInvest Ltd (2013) All rights reserved.  Except as provided in the Copyright Act 1969, this work may not be reproduced in any form without the written permission of KeyInvest Ltd.

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