Look for solutions to pension puzzle

Millions of present and future retirees would be big winners if the newborn government's mantra of "work, save, invest" included a rethink of the 2017 age pension asset test changes.

While burgeoning age pension costs are a problem, the already-legislated 2017 changes will encourage many retirees to limit their saving, over invest in the family home or dissipate their assets.

A reader, tongue-in-cheek, highlighted the effect: "The best strategy post-2017 will be to go to Flemington and invest $100,000 on a 10-to-1 chance. A win compensates for losing the pension, a loss gives an annual indexed $7800 pension payment."

Losing $7800 annually for each $100,000 of assessed assets is not a sustainable way to encourage saving or productive use of assets. In 2017, a married, home-owning couple will not receive any pension when their assessed assets exceed $820,000 but few people will be able to generate the current indexed annual pension income of $34,000 from this amount.

Until returns rise dramatically, home-owning married couples with assets of $375,000 to $820,000 will be able to earn more from spending their assets than investing them. Furthermore, given the bipartisan political reluctance to include the family home in the assets test, doubling the asset testtaper rate will not only reduce the benefits of downsizing, but encourage overinvestment in the family home.

There's still time to cushion the harsh impact of the changes on existing age pensioners by transitional arrangements that would largely remove the incentive to reduce their assets to maintain or increase their pension. A low-cost way would be to freeze current pension entitlements and allow increases only if they qualify under the new arrangements.

That option wouldn't encourage future retirees to accumulate assets in the $375,000-$1 million range, or to use the equity in their home. Again, solutions are available to expand incentives for retirees to save and use their assets productively.

Now, the asset test treatment of non-commutable lifetime annuities is inconsistent. Those received as defined benefit pensions are exempt from the assets test, but those purchased from accumulation super funds and privately are subject to the test.

Changing the assets and income test rules to treat all new non-commutable annuities consistently could give all future retirees a viable alternative to not saving or to dissipating their assets quickly to access the pension.

Given the difficulties retirees face in investing their savings, selling them a part or full age pension and the attached benefits at a conservative actuarial value could also help neutralise the perverse effect of the 2017 changes.

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Daryl Dixon

Executive Chairman

Daryl Dixon is one of Australia’s foremost investment experts and a well known writer and consultant. He has provided trusted advice to thousands of personal clients over more than 25 years and is an acknowledged expert in the areas of tax, superannuation (including public sector superannuation), social security and investments.

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