How will changes to the pension assets test affect you?

pension-asset-testFrom 1 January 2017 some retirees will see an increase in their age pension. Many others, however, face a cut, or will lose the pension altogether. This results from changes to the assets test aimed at reducing the federal budget deficit. It also addresses what some people see as an excessively generous test that allows some retirees with more than a million dollars in financial assets to receive a part-age pension.

What’s new?

At present, pensions are reduced by $1.50 per fortnight for every $1,000 of assessable assets above the assets-test free amount for a full pension, currently $205,500 for a single home-owner and $291,500 for a couple home-owner.

From 1 January 2017 this ‘taper rate’ will increase to $3.00 per $1,000 of excess assets. Pension payments will phase out more quickly and the limit on assets up to which some pension is payable drops significantly.

On a positive note, the assets threshold for a full pension will increase to $250,000 for a single home-owner and $375,000 for a couple, so some part-pensioners will see an increase in their payments.

The winners

Mike and Hope are an example of a couple that will benefit from the changes. They own their home and have financial assets totalling $370,000. This exceeds the current threshold for a full pension by $78,500, so their pension is reduced by $117.75 to a combined sum of $1,189.25 per fortnight.

Come 1 January 2017 the threshold for the full pension will increase to $375,000. With assets below this threshold Mike and Hope will find themselves receiving the full pension of $1,307.00 per fortnight, including supplements.

The losers

It’s a different story for John and Ann. As homeowners with assets of $750,000 they currently share a fortnightly pension of $619.25. However, when the higher taper rate cuts in from January 2017, their pension will drop to just $182.00. That’s a reduction of $437.25 per fortnight or more than $11,000 per year.

It’s predicted that 300,000 retired Australians will lose some or all of their pension as a result of this change. Around 50,000 less wealthy pensioners will be better off, while current recipients of a full pension will see no change.

What are the options?

Clearly the change to the assets test will adversely affect a large number of retirees and create a significant incentive to reduce assessable assets. With the family home remaining exempt from the assets test, if you wish to continue receiving a part pension, strategies that could be considered include spending on renovations to make an existing home more comfortable, or upgrading to a higher value home. Assets can also be reduced by gifting (care required here) or through spending on travel and lifestyle.

However, it’s important to consider your overall situation, as maximising age payments at the risk of reducing assets may not be the best way to achieve long-term financial security. It’s crucial that you seek qualified advice before taking action.

Don’t forget the income test

The age pension is subject to both an assets test and an income test. Whichever produces the lowest pension payment is the one that applies. While this article concentrates on the assets test, it is worth remembering that the income test underwent some changes in January 2015.

Centrelink now combines new account-based income streams with other financial assets to calculate the deemed income that is subject to the income test. While this treats all financial assets equally, it is less generous than the old treatment of account-based income streams.

Note: current calculations are based on current thresholds and pension rates. Future calculations are based on current pension rates and the thresholds that apply from January 2017.