The assessment of age pension entitlements is changing soon and for some self-managed superannuation fund (SMSF) trustees this could mean an immediate loss of benefits.
The age pension is determined based on the outcome of an Assets Test and an Income Test. For SMSF couples, it is often the Assets Test that will determine the age pension entitlement. Under the Assets Test, a homeowner couple will currently be entitled to a part Age Pension where they have assessable assets (which excludes the family home) of less than $1,163,000.
Many SMSF retirees will currently fall within the rules for receiving at least a part age pension, and in fact, even $1 of age pension entitles retirees to the Pensioner Concession Card. This provides additional concessions such as reductions on rates, energy bills, and vehicle registration, as well as concessions on medicines and health services, which can significantly reduce living expenses in retirement.
From 1 January 2017, the Assets Test assessment is changing in two ways, and here’s what it means for you.
A good change – increasing the asset threshold for the full Age Pension
The first is a good change. This is an increase in the amount of assessable assets you can have and still receive a full Age Pension entitlement. This means that some retirees currently on a part Age Pension will actually receive an increase in their Age Pension entitlement at 1 January 2017. A homeowner couple with assessable assets below $286,500 will currently receive the full Age Pension of $34,252. From 1 January 2017, this couple could have more assessable assets, up to $375,000, and still receive the full Age Pension under the Assets Test. Unfortunately, a second means test, the Income Test, may kick in, leading to an entitlement that is higher than prior to this change but below the full rate.
If you have been drawing down on your capital, and fall within these wealth thresholds, you may see a boost in income from the Age Pension in 2017 due to this change. Indeed, if you are a homeowner couple with assessable assets of less than $451,500 you can expect to receive a higher pension.
The big one for SMSF retirees – reducing the asset threshold for the part Age Pension
The second change is to the rate at which Age Pension entitlement drops away under the Assets Test and is likely to be more significant for SMSF retirees.
Currently for every $1,000 in assets above the full Age Pension threshold, you lose $1.50 a fortnight in Age Pension. From 1 January 2017, this happens faster, you will lose $3 a fortnight in pension for every $1,000 in assets above the threshold.
The amount of assets you can hold and still receive a part Age Pension is reducing. For a homeowner couple, the new Assets Test threshold will be $823,000. This is likely to affect you if you have assessable assets that sit between the current Assets Test threshold of $1.16m and the new threshold of $823,000.
It means a homeowner couple today, who is currently receiving an Age Pension entitlement of around $13,500 p.a. with assessable assets just above $823,000, will lose their Age Pension and Pensioner Concession Card on 1 January 2017. There is no grandfathering of the old rules.
If you lose your Age Pension but are currently over age 65, you may still receive the Commonwealth Seniors Health Card, which continues to provide you with concessions on medicines and health services. A loss of Age Pension may also impact the future Centrelink treatment of account-based pensions under the Income Test in your SMSF.
It’s not all bad for SMSF retirees
This change does mean that once you do receive a part Age Pension, you will head towards the full pension more quickly as you consume your capital in retirement. Under the Assets Test, for every $100,000 in assets you spend, you will receive an extra $3,900 per annum in Age Pension. From 2017, this doubles to $7,200, so you may see your Age Pension increasing more quickly as you spend your assets.
If you think you might be negatively impacted by the upcoming Assets Test changes, then there are strategies you can consider prior to 1 January 2017 that may reduce the value of your assets assessed by Centrelink.
If you are planning to spend some of your savings in the near future, perhaps for a holiday or home improvements, then bringing this expenditure forwards can be a way to reduce assets now before the 1 January 2017 changes. Similarly, if you are looking to help out family members, then the ‘gifting’ rules allow you to gift up to $10,000 in a financial year or $30,000 over a rolling 5-year period, without those assets counting towards the Assets Test. Although remember that assets gifted in excess of these limits will still be counted as assessable under the Assets Test.
Some other options to consider include:
- purchasing a funeral bond;
- superannuation fund contributions on behalf of a spouse who is below the Age Pension age;
- purchasing an annuity; and
- for aged care residents, paying a refundable deposit instead of a daily payment for accommodation.
It is very important however to ensure that these are considered in light of your entire financial situation and goals. We recommend that you seek appropriate professional advice before making any financial decisions.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
