A new way to beat Centrelink’s Age Pension assets test limit?

Centrelink’s changes to the Age Pension assets test limit in January 2017 cut off access to the Age Pension for many retirees, when the maximum value of assets owned to obtain the age pension was reduced.

If you’re a retiree and this affected you, you are probably still seething about it. Or, if you are about to retire, you might have only recently discovered that you exceed the asset test limit.

Well, 1 July 2019 might just turn out to be the answer to your problem – provided you are smart with the structuring of your financial position.

Let’s recap quickly. Back in January 2017, the Australian Government decided to reduce the asset test limit that Centrelink uses to calculate eligibility for the Age Pension, from $1,175,000 to $823,000 for a couple who own property. For a property owner who is single, this went from $791,750 to $547,000. Note, however, this asset test limit excludes the value of your primary residence and since then, the asset test limit has been indexed, so today it’s sitting a little higher than these amounts.

For a lot of people who sat close to these limits, they lost access to the Age Pension. The government did provide some grandfathering relief, with a cut-back version to try to prevent Armageddon for retirees, but anyone else just turning the qualifying age for the Age Pension was left in the dark.

Let’s jump forward to 1 July 2019. What’s about to change? Well, the government has amended its superannuation and tax legislation, and part of the new measures that have been released include a range of options for retirees with retirement income streams.

Like most things, with changes to superannuation, old ideas have an uncanny habit of reincarnation. Here’s an example: The Transfer Balance Cap of $1.6 million introduced on 1 July 2018, was really just a new version of the old Reasonable Benefit Limits, which used to be in place back in the pre-Howard era – with a few variations.

Today, the asset test exemptions with the Age Pension, which back then applied to guaranteed lifetime annuities, is making a comeback with a fancy new name: ‘Pooled Lifetime Income Streams’. Welcome back, old friend, it is like it is the year 2000 all over again!

Now like any reincarnation, or as any great tech entrepreneur will try to convince you, this time is it is ‘new’, ‘improved’, and ‘different’. Not really. To be honest we liked the old version, but like any Apple or Microsoft upgrade, we learn to live with the new version, despite transition frustrations.

So, what does this all mean?

  1. If you sit close to the Age Pension asset test limit and you invest a portion in one of these new, bright shiny ‘income streams’, then this could allow you to claim a 60% reduction of the Age Pension assets test limit, depending on a range of factors that you need to meet.
  1. Will this income stream product ever expire? If you manage to hang around as long as one of my favourite sea creatures, the sea turtle, who lives up to 150 years, you will continue receiving an income stream that massively outweighs the money you spent on buying this product. The money just keeps coming in the door and never runs out. We might not be able to match the sea turtle in terms of life expectancy, but if you do have a history of longevity in the family and are likely to live longer than the average life expectancy age, this might be a worthwhile consideration.

So, what are the downsides? Any money you put into this product you may end up saying ‘Adios’ to; it is likely you will never have access to this capital again, and your estate will receive zip too. So there will likely be a need to balance these combined objectives.

The great news is, there are some solutions.

Like any great newfangled investment product or idea, it is really important you don’t dash out and try to do this yourself. This area of investment is incredibly complex and a massive amount of modelling and analysis needs to be done. So before you jump into a change in strategy, I recommend you dust off that Y2K era Motorola Razor mobile phone and give AJ Financial Planning a call.

Is it better to retire on a $350k super fund, or a $900k super fund balance?

When it comes to retirement most people believe more is best, but is this always the case? Have the Centrelink changes that came into effect last year distorted reality; has the $350k super fund become the new $900k – without all the extra effort of squirrelling away so much for retirement?

Let’s assume we know two couples who are about to retire. One couple has a balance of $350k; the other has $900k. Both couples want a modest living standard in retirement, with an income stream of around $50k p.a.

The first couple with a combined balance of $350k can expect to receive an income stream of around $21,000 p.a. Potentially, they might also receive the Age Pension if their combined assets – excluding their home – sits under the threshold of $380,500. The projected Age Pension is likely to pay them a combined income of $35,573. Thus, they will end up with a total combined income of $56,573. It is likely that at a 6% drawdown rate, their superannuation will not be eroded too fast, so it should be possible for them to keep pace with inflation during their remaining lifetime.

In addition to receiving the Aged Pension, this couple will also receive all the benefits and concessions that normally come with it, such as discounts on utilities, medicines, etc.

The second couple has a combined super balance of $900k. Like the first couple, they own their own home. But as their combined asset balance exceeds the maximum Centrelink threshold of $837,000, they are not eligible for the Age Pension.

This couple will commence an income stream from their superannuation balance and, assuming a similar 6% drawdown limit, they will be eligible to draw a combined retirement income of $54,000 p.a. If their super fund’s performance remains reasonable, this should also last them until life expectancy and keep pace with inflation.

However, being over the Centrelink threshold means that this couple is not eligible for any of the discounts and benefits that normally accompany the Age Pension, although they will also not be affected by any government changes that might occur in the future to Centrelink thresholds.

They could also draw down a higher income stream earlier in their retirement, to enjoy travel and entertainment, etc. Then as they age their need for cashflow might not be as great, so they can gradually ‘ease off the throttle’ and reduce their balance to the $350k mark, and be in a similar situation to the first couple.

So the next time you are feeling a little underwhelmed about your retirement picture, it’s important to give consideration to all options that might be available to you. Sometimes, bigger may not be better. Or, you might be better off sitting at the $900k balance, possibly spending the difference on home improvements, travel, a new car etc. Later you could drop to the Age Pension limit, and even if you receive just $1 from the Age Pension, it still means you qualify to enjoy the other benefits that come with this government offering.

Before delving into a retirement strategy, it’s important you take your personal situation into account and seek advice from a qualified financial planning professional. Of course, we recommend AJ Financial Planning.