Impact of 1 January 2017 Assets Test changes
In recent years there have been a number of changes to the social security pension rules. The latest change to soon take affect is the increasing of the Centrelink/DVA Assets Test thresholds and taper rate from 1 January 2017.
In this article we summarise the changes, the impacts and the options that are available to help.
Summary of Changes
There are two changes to the social security pension Assets Test occurring on 1 January 2017:
- an increase to the Assets Test thresholds; and
- doubling of the taper rate from $1.50 to $3 per $1,000 of assets per fortnight.
The first of the changes relate to the increase in the Assets Test thresholds allowing clients to hold more assets before their pension starts to reduce under the Assets Test. For some clients with lower asset levels, this may lead to higher pension entitlements. For others, the Income Test will continue to determine their entitlements.
The second change, which is likely to have the biggest impact on Age Pensioners, relates to the increase in the taper rate. This change will reduce Age Pension entitlements at a faster rate once assessable assets exceed the new Assets Test thresholds (estimated to be $375,000 for couples and $250,000 for singles). The largest reduction in pension entitlements will occur at the new Assets Test cut-off thresholds (estimated to be $814,250 for couples and $541,250 for singles). Pensioners with assessable assets above the new cut-off will see their pensions reduce to nil.
The immediate impact of a reduced (or lost) pension is a reduction in cash flow. However, there are also two other effects which are also important.
The first is the loss of grandfathered status on existing Account Based Pensions (ABPs). ABPs that commenced prior to 1 January 2015 can only remain grandfathered if a pensioner continues to be in receipt of an income support payment such as the Age Pension. Pensioners who lose their Age Pension entitlement on 1 January 2017 because of the Assets Test changes will have their ABPs deemed. In many cases this will lead to higher levels of assessable income going forward and therefore may make it difficult to re-apply for the Age Pension later on in life.
The second is the loss of the Pensioner Concession Card (PCC) and the concessions it provides. On the positive side however, the Government has put in place provisions to ensure those who lose their PCC, because of the new Assets Test changes, are automatically issued with a Commonwealth Seniors Health Card (CSHC) and the Low Income Health Care card (LIHCC) without being subject to the applicable income test. This will replace many (not all) of the concessions available under the PCC.
Managing the cash flow reduction
Some clients may simply review and tighten their budgets to offset the reduction (or loss) in their pensions. Others may find this approach challenging, particularly those facing a larger reduction in entitlements. It can also be difficult for clients who are in the early years of retirement, a period when they may be most active.
Where clients are looking to maintain their cash flow, there are a number of options and strategies that can help manage the impact of the Assets Test changes. These include:
- increased drawdowns from income streams or savings; or
- asset reduction strategies such as:
- bringing forward any future gifts up to the allowable limits ($10,000 per financial year, $30,000 over five years)
- bringing forward capital expenses or home renovations which may help reduce ongoing living expenses and/or increase comfort in retirement
- investing up to $12,500 (per person) in a funeral bond or pre-paying funeral expenses (no limit)
- investing a portion of capital in a lifetime annuity which can help meet ongoing cash flow needs from its regular income payments, and improve Age Pension entitlements over time with its reducing asset value.
It is important to keep in mind that each option has its own advantages and disadvantages and each option should be considered in light of your particular circumstances. Furthermore, spending for the sake of spending is likely to leave you in worse-off financial position overall.
We are here to help should you wish to discuss the impact of the Age Pension entitlements on your particular circumstances.
This information is of a general nature only and has been provided without taking account of your objectives, financial situation or needs. Because of this, you should consider whether the information is appropriate in light of your particular objectives, financial situation and needs.
Written by Shereen Churchill (Financial Adviser)
ITL Financial Planning and its advisers are Authorised Representatives of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357306. www.fortnum.com.au. Any information on this website is general advice only and does not take into account any person's objectives, financial situation or needs. Please consider your own circumstances and consider whether the advice is right for you before making a decision. Always obtain a Product Disclosure Statement (if applicable) to understand the full implications and risks relating to the product and consider the Statement before making any decision about whether to acquire the financial product.