Uncertainty prevails for retirees

Historically low interest rates and the threat of major changes to age pension arrangements are combining to unsettle current and future retirees.

With about 80 percent of retirees eligible for a full or part age pension, the prospect of losing access to this safety net adds to the difficulty of funding a comfortable retirement.

To cushion the blow in the past, many existing benefits were protected - or grandfathered - from the impact of the numerous changes to superannuation and social security rules. Grandfathering helps avoid retrospectivity by applying all the changes only to decisions taken in the future.

It's too soon to determine the fate of the budget proposals to limit the allowable deduction for personal contributions to defined benefit pensions in 2016 and double the asset tests taper rate to 7.8 percent in 2017. So far, these measures don't contain grandfathering provisions to protect existing age pensioners.

If implemented as proposed, a considerable number of retirees would lose or be eligible for a reduced age pension. This will encourage retirees to restructure their affairs in order to help protect their situation. The pressure to do this would be greatly reduced if the changes were applied only to new applicants for the age pension.

Even limited grandfathering provisions, such as freezing the current level of pension entitlements for retirees adversely affected by rule changes, would remove the harshest impact.

Losing all pension entitlement incurs the additional cost of losing access to the pensioner concession card and being eligible only for a seniors health card. Retaining access to the concession card would limit the incentive created by the latest benefit reductions to dissipate assets to regain pension entitlement.

The problem with dissipating assets is the uncertainty about whether they'll be needed to fund health, aged care and other unexpected needs in retirement. Unlike the working population, retirees can't earn more to replenish their cash reserves.

For most, the major asset available to draw on in retirement is the family home. But the latest changes to the assets test will penalise retirees who obtain more than $200,000 from selling their home.

Given the continued exemption from the assets test of the owner-occupied home, retirees who've already sold their home can be justifiably aggrieved if the proposed changes remove their age pension entitlement. Their chances to reacquire a home are likely to be limited.

Grandfathering existing entitlements can help reduce the pain of proposed changes while still generating long term savings.

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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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