Superannuation And The Age Pension
2017 brought in some significant changes that affect recipients of benefits such as the aged pension. When a person receives the aged pension, their eligibility for that pension is affected by two tests: an income test and an assets test. Both tests dictate that, once income or assets pass a threshold, the amount of aged pension to which a person is entitled will fall. Where the income and assets tests give different results, you receive the lower of the two.
The income test
You can only receive a full age pension if your income is below $168 per fortnight (for singles) or $300 per fortnight (couples combined) If your income is above this, you may still be entitled to a pension, however, for every $1 of income above these amounts, the aged pension reduces by 50 cents. Entitlement to an age pension cuts out if your income exceed $1,944.60 per fortnight (single) or $2,978.40 per fortnight (couple) – although if you are a member of a couple and you need to live apart due to ill-health, this ‘upper threshold’ is higher.
The income is calculated based upon actual income received from employment and rental and from income you are assumed ‘deemed’ to have received on financial assets such as superannuation, income streams, investments and cash in the bank.
The assets test
You can only receive a full age pension if your assessable assets are below the following:
|Maximum allowable assets for a full pension||Homeowners||Non-homeowners|
|in a couple, combined||$380,500||$583,500|
If your assets are above these levels you may still be eligible for an age pension. For every $1000 by which your assets exceed these limits, your aged pension is reduced by $3 per fortnight. The rate is slightly lower if you are a member of a couple and you need to live apart due to illness. This means that you will not receive any aged pension once your assets exceed:
|Maximum allowable assets for a partial pension||Homeowners||Non-homeowners|
|in a couple, combined||$827,000||$1,030,000|
|illness separated couple, combined||$973,000||$1,176,000|
A family home does not count towards the assets test. But superannuation benefits, investments and cash in the bank do.
Changes to the Taper Rate
The reduction by $3 for every $1000 of assets above the bottom threshold is known as the ‘taper rate.’ And the taper rate was doubled in 2017, from a previous level of $1.50 for every $1000 of assets above the bottom threshold. Doubling the taper rate has substantially reduced the upper threshold beyond which no pension is payable.
The reason for doubling the taper rate is obvious: the government wants to reduce the number of people who receive a ‘part pension’ (any pension less than the full amount).
Consequences of the change to the taper rate
One of the consequences of doubling the taper rate has been to reduce the amount of income available to people with more in superannuation or other financial assets. For example, a couple who own their own home and have $500,000 in their super fund (and no other significant assets) will potentially have less income available than a similar couple with only $400,000 in super. Here is how it looks in a table:
|Full annual pension||Super||Reduction in full pension||Annual aged pension amount|
Couple 2 receive $7,800 less in Centrelink benefits than couple 1. In order to make up the shortfall, they need to withdraw an additional $7,800 from their super fund. Doing this will simply give them the same spending money as couple 1. $7,800 is 7.8% of the additional $100,000 that couple 2 hold in superannuation.
Commentators whip themselves into a frenzy
Many commentators are suggesting that this is unfair. Having saved more during their working life, couple 2 now need to withdraw more of their superannuation just to enjoy the same disposable income as couple 1.
Some commentators have even gone so far as to say that there is little immediate value in owning non-home assets above a value of around $400,000 (for a couple). They are calling this the ‘superannuation sweet spot.’ These commentators worry that people with non-home assets above that amount will be encouraged either to spend the excess quickly (perhaps by having an absolutely sensational first year or two of retirement!) or to invest the excess into a family home. Unfortunately, simply giving away the excess amount, for example to assist adult children to purchase their own homes, won’t work because ‘excessive’ gifts are added back for the purposes of the assets test.
Now let’s take a cool shower and get some perspective on the issues
Discussions about what is fair when it comes to retirement policy are important, we need to be having appropriate discussions about how we structure our financially system society to provide a viable retirement safety net without unduly penalizing people who are prudently saving for themselves.
Unfortunately, however these discussions tend to end up down a rabbit warren of envy, entitlement and political ideology. We tend to get people comparing themselves against their neighbor (or more often their brother or sister in-law) and focusing on why it’s not fair.
Case studies tend to lead to false conclusions, ‘you get less pension if you have more money so I should have less money’, without thinking through the overall reality of that outcome.
So, I’m putting the lid back on them and turn your attention back to the down-to-earth practical considerations.
We hold these truths to be self-evident
Your age pension may be reduced if your assets are above a certain level
Those with more are required to shoulder more of their own costs.
While certain entitlements may be reduced, it is rare for someone to be actually worse off overall by having more money
More money usually gives you more options
As you drawdown on your resources over the course of your retirement, your eligibility for the age pension will increase
The beauty of our pension system is that it helps individuals smooth out their retirement incomes
It is probably not as scary or as bewildering as it seems at first.
Good planning, particularly if done early can help you increase your financial security, flexibility and potentially your pension eligibility.
The good news is that effective planning can solve many of the issues. And it is worth doing, because an entitlement to the full aged pension is worth around $1 million in terms of assets (that is, you need around $1 million in assets to generate income equal to the full aged pension).
At Finance Women we help you to understand your potential eligibility for the Age Pension and put in place sensible measure to support your financial security and independence.
In an ideal world we would start planning these things early, however remember the old Chinese proverb….
“The best time to plant a tree was 20 years ago…..
………the next best time is now”