Rules give little reason to save

Current and future retirees now have precise details of how the new harsher age pension assets test will impact on their retirement finances.

From January 1, the cut-off points for any age pension entitlement are set for home owners at $542,000 (single) and $816,000 (couple combined), with an additional allowance of $200,000 for non-homeowners.

These cut-off points are less than 70 per cent of the asset test limits and will inevitably result in a large number of retirees losing all or part of their age pension. Coming at the same time as official interest rates and conservative investment returns are at historic low levels, the asset test changes will squeeze the incomes of self-funded retirees.

Just how tough the situation facing self-funding retirees will be is illustrated by assuming investment returns equal to the pensioner deeming rates applied to financial assets.

The new assets test precludes an access to a pension for home owners when their deemed accrued investment income is only $16,893 (single) and $25,782 (couple combined). These incomes are even below the maximum annual age pension entitlements of $22,804 (single) and $34,382 (couple combined).

The plight of retirees relying on their savings to live is also emphasised by the unchanged income test rules applying to personal exertion income and defined benefit pensions not included in assets subject to the asset test.

The income test allows retirees to receive a part age pension until their annual income reaches $49,873 (single) or $76,356 (couple combined). In addition, at age pension age an additional work bonus of $250 a fortnight or $6500 a year is also exempt from the income test.

Unfortunately, the work opportunities for most retirees are limited, reducing scope for many to take advantage of the substantially more-generous income test arrangements.

Planning ahead for retirement in the future will nevertheless involve maximising opportunities for full or part-time work and placing less emphasis on accumulating assets other than the family home exempt from the asset test.

For about 300,000 retirees disadvantaged by the new asset test rules, the 7.8 per cent assets tax rate provides a strong incentive to dissipate existing savings.

Even though it may take several years to regain eligibility for lost age pension entitlements, with today's investment returns, investors will be struggling to receive a 7.8 per cent return. Even if an annual 5 per cent return can be achieved, for a couple with $816,000, the annual income would be only $40,800, only $6000 more than the maximum age pension available to couples.

The negative impact of the assets test on incentives to save or to retain assets could thus be considerable.

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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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