Judging by reader feedback, current and future retirees are unlikely to allow the tougher assets test applying from January 1, 2017 to frustrate their desire or plan to obtain a part age pension. When announcing the change the Treasurer estimated that up to 300,000 retirees would lose part or all of their age pension when the new 7.8 per cent assets test taper rate came into effect.
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Since that time, interest rates and investment returns have fallen, increasing the pressure on retirees to draw upon capital to live. The financial reality in today's low interest rate regime is that a part or full age pension is an increasingly valuable asset providing a fortnightly government-guaranteed income stream.
While older retirees may be reluctant to dissipate large amounts of capital to retain their previous pension entitlement, the investment returns now provide compelling reasons to do so. Put simply, for a married couple, owning $1 million of assessable assets removes all entitlement to an age pension from January 1, 2017.
But spending $700,000 of those assets on home improvements, holidays and other personal outlays would allow access to the full age pension of an indexed $34,000 a year with an actuarial value today of around $1 million. Unlike for other investments, the benefits of receiving the age pension are certain and not dependent on trends in financial markets.
An assets test taper as high as 7.8 per cent when the cash interest rate is 1.5 per cent a year will encourage the dissipation of assets by all but the wealthiest of retirees owning financial assets. Several readers indicated that they're renovating their owner-occupied home and planning holidays to retain their current pension entitlements when the new asset test applies. Another reader's change of plans in response to the new rules is to stop work earlier and live off capital until reaching pension age.
The options for defined benefit retirees are even more attractive in that benefits taken as an indexed pension or annuity from their funds aren't valued as an asset for asset test purposes. The income is assessed under the income test. Purchasing a private sector lifetime annuity doesn't have the same attractions for giving access to the age pension. Since 2007, private sector annuities are assessed under both the assets and income test.
Effectively, in addition to encouraging investment in the assets test exempt family home, the age pension rules will soon discourage many more retirees from building up and retaining financial assets in retirement. Without radical changes such as exempting private sector annuities from the assets test or selling the age pension to retirees, self-provision for retirement will become far less popular once the 7.8 per cent assets taper begins.
Daryl Dixon is the executive chairman of Dixon Advisory. comments@dixon.com.au
