Tighter assets test impact hard to avoid
As explored in earlier columns, the doubling of the pension asset test taper rate to 7.8 percent will, if implemented, encourage current and future retirees to overinvest in the family home or to dissipate their capital. However, at the same time, the government has not altered the opportunities for defined-benefit superannuation fund pension recipients to access an age pension.
They can do this using the favourable Centrelink treatment of the defined-benefit fund indexed pensions, the capital value of which is totally ignored under the assets test.
Centrelink determines age pension entitlements as the lower of the amount calculated under both the assets and income test. By tightening the assets test and leaving the income test formula unchanged, the government will bias the system in favour of retirees whose entitlement is determined by the income test.
The 2017 asset test changes deprive all home-owner couples with more than $823,000 of assessable assets from getting any pension. But the unchanged income test will not deprive the same couple of their entire pension until their assessed annual income in 2017 exceeds $75,000. Generating this income from investing $823,000 requires an annual rate of return in excess of 9 percent.
This, and a similar calculation for single people, illustrates just how much the revised age pension system will encourage future defined-benefit fund retirees to take all or the larger part of their superannuation benefits as lifetime pensions. Unfortunately, access to the favourable treatment of defined-benefit lifetime pensions exempt from the assets test is confined largely to former government sector employees.
The bulk of the population, whose superannuation payouts come entirely as a lump sum, have no similar easy way to avoid the harsh impact of the assets test.
Consider the fortunate members of the federal government's defined-benefit PSS fund closed to new members in 2005. At age 65, members can convert their lump sum benefit to a lifetime indexed pension using a conversion factor of 10. This provides them with many options.
These include assuming a home owner couple with $100,000 of other assets taking all of a $900,000 entitlement as an indexed pension of $90,000 annually. This would rule out receiving any age pension. But taking an annual indexed $60,000 pension and a $300,000 lump sum gives access to a part age pension and the attached benefits and leaves $400,000 available to draw down in retirement.
The full lump sum option would, unless the assets are largely invested in an asset-test-exempt family home, remove any chance of getting a pension until assessed assets fall below $823,000. The couple would also miss out on the regular and certain fortnightly income provided by a defined-benefit pension.