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?
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.
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.
I was recently went around the corner from my office to eat at an Italian restaurant. It was one of those restaurants where the entire menu is in Italian. Now my Italian is sketchy at the best of times, but what was a little more tricky was the menu items. Normally when you look at a menu you can quickly identify a couple fail safe options, this place however had me stumped. This restaurant was one of those places when I read the menu and went “Gosh! I can’t find anything!” Then when I looked more carefully some of the items listed start out sounding really nice… but then halfway through the description they added something funky!! So what’s this got to do with super and being in your 50’s? Stay with me….. When it comes to your 50’s and superannuation you start to get access to a whole heap of options for your consideration. However, like the Italian restaurant, sometimes they all sound interesting initially but once you get into the finer detail you need to make sure that you are not getting anything unexpected. So that you don’t end up feeling stumped like I did at the Italian restaurant, I thought I would give you a couple of tips on what you should be considering: 1. If you are in your 50’s and have some debt, you may be better of salary sacrificing the income into super than paying down the debt. The main reasons are:
By salary sacrificing the money into super you may be taxed less
At retirement you could draw a lump sum out and clear the debt out.
There are a heap of variables with this approach and it is important to crunch the numbers. You may find that this may save you heap of tax and allow you to clear the debt too. 2. If you have reached preservation age and can access your superannuation, one thing you might question is do you either draw an income stream, a lump sum, or do nothing at all? For some it makes a lot of sense to commence a transition to retirement strategy. This strategy is a way to reduce your overall tax position considerably. Your super fund also becomes 100% tax free too. However if you are a high income earner, you may decide to hold off and start this until you hit age 60 years old. If you are retired you may choose to take a lump sum rather than an income stream as this may save you tax too due to a different tax treatment of lump sums over income streams. Once you reached a condition of release which for some can be as early as age 55, there are a heap of options available to you with your superannuation. It is important to make sure you are maximising this as much as possible to reduce your tax, position yourself for retirement and maximise your capital. These points above are just a few of the things we consider when we look at your overall financial position to develop a Financial Plan. So unlike my restaurant experience, there is help available to make sure you aren’t getting anything unexpected in your financial future. Like all great ideas with Financial Planning however, it is important that you obtain professional advice before implementing any strategy – and we would of course recommend that you speak with our team at AJ Financial Planning.
When you take a lump sum amount from your superannuation/pension account in addition to your regular income stream payments you will often have the choice to consider this payment as either:
additional pension payment or
a commutation of your pension.
Most of the time the best choice will be to consider the additional lump sum as an extra pension payment (1). This is because the commutation option will reduce the initial purchase price of the income stream and usually increase the amount of your income stream that is counted for the income test and leave you with a lower age pension received. In some situations a commutation can be the better option and it is best for a financial planner or other person with experience in age pension matters to perform a comparison of the two options for you.
Income Stream Rule Changes
A new rule is coming into force on 1 January 2015 which will change the way that income streams are looked at by Centrelink. For pension started before this date they will be treated by the old way i.e. ‘grandfathered’, which gives a certain deductible amount that is not counted for the Centrelink income test. All pension income drawn above this deductible amount is counted for the income test.
For pensions started after 31 December 2014 the asset value will be deemed just as other financial assets are (e.g. bank accounts, shares, term deposits, managed funds etc.) see http://www.humanservices.gov.au/customer/enablers/deeming. This means that the same amount of income will count for the Centrelink income test regardless of how much you actually take as an income.
At the moment the first $79,600 of financial assets for couples are considered to earn 2% income and assets above this amount are considered to earn 3.5%. It doesn’t matter if your financial assets earn more or less than this, Centrelink just uses a flat rate to simplify things.
When can a commutation be a good idea?
As we pass the 1 January 2015 date when the new Centrelink treatment will commence for new pensions, retirees can review whether they will receive a higher age pension under the old system or the new ‘deeming’ system. If the new system will offer a higher pension then you can contact your superannuation product provider to do a complete commutation of your pension to start a new pension. This will then ensure that your income stream is treated under the new rules.
How to receive a higher Centrelink Age Pension?
If you are a retiree it is important that you review your income stream and age pension situation under the current rules and the new rules that will start on 1 January 2015. If you will be better off under the new system you will then need to talk to your superannuation provider to complete a full commutation and then advise Centrelink accordingly.
You must also realise that once you change to the new system you cannot ‘go back’ to the old system. For this reason it is vital that you have a financial professional with experience in Centrelink and Age Pension matters review your income stream and evaluate the benefits of changing to the new system.
If you would like AJ Financial Planning to review your Centrelink and income stream situation, we are offering a free initial consultation and review. To take advantage of this offer please call (03) 9077 0277 or email email@example.com with the subject “Centrelink Review”.