Taper reset forces investment rethink

Judging by reader feedback, the proposed doubling of the age pension asset-test taper to 7.8 percent will force many current and future retirees to alter their retirement investment strategies. Historically low interest rates have already been forcing selffunded retirees to dip into their capital to live and losing all or part of their age pension entitlement will increase their need to do so.

The first assets to be liquidated are likely to be the lowest yielding ones including holiday homes, low-yielding investment properties and cash reserves. One reader has already worked out that using the proceeds of selling a holiday house to finance the redevelopment of the family home will increase age pension income even when the new rules apply from January 1, 2017. In this case, the restructuring of the portfolio by selling a non-income producing asset and investing the proceeds in an asset-test-exempt family home generates a larger age pension.

With the new higher assets-test taper rate, holiday homes and other low-yielding property assets could well be luxuries that future retirees will not be able to afford. Similarly, while cash holdings and term deposits have always been viewed as safe and certain retirement options, the new 7.8 percent taper rate turns these investments into loss-making propositions.

The pressure on retirees subject to the asset test will be to concentrate on assets yielding higher returns, including shares and financial products. This means that unless and until higher interest rates return, this asset class will be less popular and retirees will start focusing on more risky assets.

Ironically, the high assets-test taper rate reduces the investors' risk because any loss of capital will increase the future age pension entitlement. The downside is that where the assets test applies, all capital appreciation will reduce pension income.

The ideal investments will be ones giving a high annual income with little prospect for growth. Apart from altering the attractions of individual assets classes, the new taper rate provides an incentive to retire early and draw down capital to live until becoming eligible to obtain an age pension.

In the future, retiring at 67 with $1million in super will deprive a married couple of any age pension. The same couple could retire at 60 and draw down their super to $350,000 at age pension age and then receive the full age pension which has a capital value of about $1million. This is the strategy that one reader has already decided to pursue and is likely to be pursued by many others as a lower risk retirement option rather than maximising retirement assets.

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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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