Life is set to get tough for self-funded retirees

Reader feedback on the new age pension test has highlighted just how tough life for self-funded retirees with financial assets will be after January 1, 2017. They will be struggling to obtain after-tax investment returns higher than the new asset test taper rate of 7.8 per cent.

Even shares paying fully franked dividends or listed real estate investment trusts don't generate annual yields as high as this, while term deposits and bonds only yield around 3 per cent. For many, the new assets test taper rate adds to the difficulty of funding retirement.

The first $250,000 (single person) or $375,000 (couple combined) of assessed assets are exempted before the 7.8 per cent taper applies but the annual income of these assets is assessed under the more generous separate income test.

The income test applies to annual incomes above $4264 (single) and $7592 (couple combined) at a 50 per cent withdrawal rate. Thus even when financial assets are exempt from the assets test, the income test reduces annual pension entitlements by up to $1562 (single) and $1686 (couple combined).

The fact that non-income producing assets such as personal effects and cars are included in the assets test reduces the impact of the income test. Furthermore once the assets test applies, the 7.8 per cent taper rate renders the income test calculations largely irrelevant.

Applying the 50 per cent income test taper to the 3.25 per cent deeming rate reduces pension entitlements by only 1.6 per cent of the value of financial assets.

The assets test taper is 6.2 per cent higher than this effectively operating as a very high annual wealth tax. Assuming all the assets owned by retirees are subject to deeming, once assessable assets exceed $275,000 (single) and $402,000 (couple combined) age pension entitlements will be determined under the assets test.

This will deny many self-funded retirees access to the more generous income test provisions. This will be the situation unless and until investment returns increase dramatically and adversely affect retirees with assessable assets in excess of $275,000 (single) and $402,000 (couple combined).

Limiting ownership of assets other than the exempt family home to the above levels will ensure access to an annual indexed age pension of as much as $20,855 (single) and $32,776 (couple combined).

At today's investment returns, for retirees to obtain a secure income without any age pension would require assets as high as $900,000 (single) and $1.3 million (couple combined).

These facts will bias future retirement plans towards investment in the exempt family home and ensuring assessed assets do not fall in the range where the test applies.

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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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