Retirement policy muddle puts retirees at risk

Recent comments and controversy about the changes needed to control the burgeoning costs of an ageing population illustrate just how difficult it will be to achieve viable and sustainable retirement income policies.

The age pension changes already proposed and calls for sharp cutbacks in superannuation tax concessions involve retrospective changes that would adversely affect many people who have made irreversible decisions based on the current rules.

These decisions and new proposals to deal with emerging budgetary problems blatantly ignore the unfavourable consequences for the people affected and their likely responses. For example, Social Services officials are warning about the risks for age pensioners of dissipating assets in order to retain their pensions when the assets test taper rate is doubled from January 1, 2017.

That advice might have substance if the new proposed taper rate of 7.8 per cent still provides a positive return from owning financial assets. But the official cash rate is at 2 per cent and 10-year bonds are yielding around 3 per cent. With these investment returns, introducing a 7.8 per cent taper rate amounts to a hefty wealth tax on many current pension recipients.

The pain will be even larger for existing pensioners who don't own a home or have downsized because of the meagre $200,000 extra exemption for non-homeowners. Adverse consequences for these non-homeowners could have been avoided if the government, as has been the case until now, grandfathered existing pension entitlements.

As it stands, the changes place homeowners and people yet to retire in the box seat because of the opportunity to protect or enhance their future pension entitlement by retaining or increasing their investment in the family home.

If Social Services wants to provide advice about the impact of the proposed changes it should be warning current and future retirees that selling or downsizing the family home could well negatively affect their age pension entitlements. In doing so, the most relevant point for married couples is that, because of the application of the assets test, assets above around $450,000 will not generate additional income to help service the costs of renting.

Proponents of more radical changes, such as including the home in the assets test or removing or reducing the tax concessions for superannuation, gloss over the key issue that achieving substantial budget savings will involve retrospective changes. In both of these areas, millions of people would be unfavourably affected.

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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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