Talking retirement and Age Pension strategies

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Retired actuary and author John De Ravin knows our retirement income system can be complex and, to help, has written a book of financial strategies, including chapters for pre-retirees and retirees. In this extract from Slow and Steady: 100 wealth building strategies for all ages, he outlines the strategies that can determine whether you could qualify for a full or part Age Pension.

•••

Strategy 78: Give it away!

Read this strategy if:

  • you are approaching Age Pension eligibility age (but ideally have at least five years to go)
  • you expect to receive a part Age Pension (that is, your assets are neither so high as to preclude you from receiving any Age Pension, nor so low that you expect to receive the full Age Pension)
  • you will not have much earned income in retirement and you expect your part pension to be determined by the result of the assets test rather than the income test
  • you would like to find ways of increasing the amount of Age Pension you will receive.

Background

In Australia, when you reach Age Pension age, if you are eligible for the pension then you can apply but the amount of pension to which you are entitled is subject to means testing.  Currently, the means testing comprises:

  • an assets test
  • an income test.

Age Pension payments are subject to a maximum amount payable for a single pensioner and a (higher) maximum amount for a couple. The maximum amount payable increases by a “rental assistance” amount if you do not own your own home. Each of the two tests is applied to determine the amount of pension you are entitled to receive according to that test, and the pension to which you are finally entitled is the lower of the amounts that result from applying the assets test and the income test.

In most cases, unless you are earning significant income from your personal efforts (as distinct from income from financial assets), it is the assets test that will determine how much Age Pension you will receive.

With effect from 1 January 2017, the Age Pension ‘taper rate’ due to the impact of the assets test has changed, as well as the lower and upper thresholds of the assets test.  The taper rate used to be $1.50 per fortnight of pension per $1000 of assets held in excess of the lower assets test threshold, but from 1 January 2017 the taper rate increased to $3 per fortnight of pension for every $1000 of assets held in excess of the lower assets test threshold. However your home remains exempt (at least for the time being) from the assets test.

But the $3 per fortnight amounts to a little over $78 per year, which means that for every $1000 you hold in assets in excess of the lower assets test threshold, you will lose 7.8 per cent of that excess amount in annual Age Pension.

But interest rates are currently extremely low in Australia (and around the world).  Typical bank savings accounts pay less than 1% interest and 10-year Australian government bonds also yield less than 1% per annum.  What this means is that if you have (say) $100,000 in assets above the lower assets test threshold, and you invest it in bank deposits or Australian government bonds, you may earn $1000 on your money, but if you throw your $100,000 out the window, you will get an additional $7800 in Age Pension, indexed, for the rest of your life (or at least as long as your asset balance would have continued to exceed the lower assets test threshold by $100,000).

Of course, apart from the $1000 that you could earn in income on that additional $100,000, you could use some of it to supplement your lifestyle, so that you could use some capital to increase your consumption to the same $7800 as you would have received had you been receiving the full pension. But if you invest your funds conservatively (as many retirees do) then your invested money will not last your lifetime if you want to draw down 7.8 per cent every year.

In fact, it can be shown that if you spend down your funds prudently, with the objective of producing a stable and consistent level of consumption over your lifetimes, and if you invest cautiously (for example, in bank accounts), then the ‘effective tax rate’ that applies to assets held in excess of the lower threshold of the assets test is more than 100 per cent! In other words, what you lose in Age Pension payments as a result of having that extra money is more than the extra money itself!

This means that there is a significant incentive, for those who expect their assets in retirement to be between the lower and upper thresholds for the assets test, to dissipate assets in excess of the lower threshold in order to gain additional pension.

Of course, you might question whether it is good public policy for the government to apply a taper rate so penal that it’s better for a retiree not to have the additional funds.

Key point
It is well known to financial planners and to astute financial commentators such as Daryl Dixon that those who expect the assets test to determine their Age Pension amount, and who expect their assets to fall between the lower and upper assets test thresholds, will find it attractive to consider ways of reducing their asset base for assets test purposes to secure higher Age Pension payments.

There are a number of ways in which you can do this:

1.         Sell your existing home and buy a more expensive one. This works from an assets test point of view because your own home is exempt from the assets test. 

2.         Renovate your existing home. Again, any increase in value of your existing home falls outside the assets test because your home itself is not asset testable.

3.         Prepay your funeral. This avoids having to pay the expenses of your funeral from your estate, and a prepaid funeral does not count as an asset for asset testing purposes.

4.         Spend it! You can take a long and expensive holiday or throw the party of a lifetime!

5.         Give it away! Just plain give away your money – maybe to charity, maybe to friends, but more likely to those relatives who would be likely to be your beneficiaries when you pass away anyway.

It may seem strange given that so many of the strategies in this book are designed to increase the assets you have as you approach retirement, but this strategy is aimed at reducing your assets.

How to do it
You need to decide which of the above five strategies for reducing your asset-tested assets appeals to you.

1.         Sell your existing home and buy a more expensive one. Of course, selling a home and buying another one does involve a significant level of expense, perhaps of the order of 10 per cent of the selling price of your existing home, and these expenses have to be factored into your assessment of whether this strategy will help you end up with the home you want and the level of asset testable assets you want. This is more likely to be a viable option if, for some reason, you were in any case considering moving house at around the time you reach Age Pension age, perhaps because you want to downsize your home, or because you want to live in a different neighbourhood, or because you want to move closer to your own ageing parents, or for some other reason.

2.         Renovate your existing home. Again, any increase in value of your existing home falls outside the assets test because your home itself is not asset testable. This is a good option if you can think of something that really needs doing, which will make your life more enjoyable.

3.         Prepay your funeral. As long as you have a contract that says you’ve paid in full for your funeral, the amount paid to a funeral director is not counted as part of your assessable assets. (You can also use funeral bonds to pay for your funeral but the amount you can invest in these is limited to an ‘allowable limit’, currently $13,500 as of 1 July 2020. This amount is indexed every year on 1 July.)

4.         Spend it! 

5.         Give it away! For asset testing purposes, you can only give away assets up to a certain amount ($10,000) each year, and can only give away $30,000 in any five-year period. Any additional assets that you give away will be treated as ‘deprived assets’ and the excess over the amount permitted by the gifting rules will still be included as assets for asset testing purposes for five years after you make the gifts. So ideally, you need to consider this strategy five years before you become eligible for the Age Pension. If your eligibility age is 67, that means you need to think about gifting some of your assets before you turn 62.

What does it mean for you financially?
Because the assets test “tapers” your Age Pension entitlement at $3 per fortnight for every $1000 of assets you have in excess of the lower assets test threshold, effectively, for every $1000 that you manage to dispose of (other than by giving it away in excess of the gifting rules within five years), you get a return of 7.8 per cent on the money that you now don’t have. There are a little over 26 fortnights in a year so you will get an additional $78 of Age Pension income per $1000 that you get rid of. What is more, the income is paid by the Australian government and it is indexed half-yearly. By comparison, if you invested money ‘safely’ in a term deposit with a bank or in a cash account, you would probably get only about $10 of income from your money (though it is fair to say of course that you would still have the $1000 to draw down on whenever you wanted it). 

The stringency of the assets test also has implications for those who are not yet retired, but who expect their assets at retirement (other than their own home) to fall between the lower assets test threshold and the upper assets test threshold. 

The table below shows the lower assets test thresholds, with effect from 20 July 2020, from the Services Australia website:

If you’re                                              Homeowners   Non-homeowners

Single                                                  $268,000         $482,500

In a couple, combined                         $401,500         $616,000

Illness-separated couple, combined    $401,500         $616,000

One partner eligible, combined          $401,500         $616,000

The upper assets test thresholds, with effect from 20 July 2020:

If you’re                                              Homeowners   Non-homeowners

Single                                                  $583,000         $797,500

In a couple, combined                         $876,500         $1,091,000

Illness-separated couple, combined    $1,031,500      $1,246,000

One partner eligible, combined          $876,500         $1,091,00

Because the current asset testing taper rate is so penal relative to the income you can earn from investing the funds conservatively, it isn’t worth making much effort to get into the asset testing range unless you are aiming to achieve assets at retirement that are comfortably above the top end of the asset testing range.

Factors to take into account before you decide
It is important to note that this strategy does not apply to those whose assets will fall short of the lower assets test threshold (since these people will always receive the full Age Pension anyway) and also does not apply to those whose assets will comfortably exceed the upper assets test threshold (since these people will be self-funded anyway, and will not receive any Age Pension unless perhaps after a number of years they find that their assets have fallen below the upper threshold so that they can start to receive a part Age Pension).

The reasoning above in relation to it being better to give your money (in excess of the lower Age Pension asset threshold) away by the time you hit Age Pension age applies to those who are commencing the pension but not necessarily to those who are already older. For example, someone aged 85 or 90, even if their assets were between the lower and upper thresholds, would be better off by spending down their assets at a reasonable rate (perhaps 7 per cent to 10 per cent of their assets) to support their lifestyle rather than aiming to spend down a large amount of assets to get more pension.

There is very little risk that the Australian government will default on its pension payments. However, there is a significant risk that the government will change the Age Pension means testing arrangements. For example, a significant change in those arrangements commenced on 1 January 2017, and many part age pensioners lost their part entitlement as of that date. So there is a risk that if you somehow ‘dispose’ of some of your assets in excess of the lower threshold, you may not get the full amount of the additional pension that you were expecting in future years – for example, if the government again tightens the means testing requirements.

If you are not yet retired but are trying to decide how fiercely to save for retirement, it is important to identify where you fit into the asset testing range. If you will more or less inevitably fall short of the lower assets test threshold, then any additional moneys that you accumulate will be yours and it will be worth the effort to save those additional funds to build up your asset base for retirement. Saving will increase your lifestyle in retirement.

Also, if you expect to be well above the upper assets test threshold, you will be a ‘self-funded retiree’ and again, whatever you can do to increase your assets will flow directly through to your assets in retirement and therefore to your retirement lifestyle.

However if you are ‘in the middle’ and expect to be receiving a part Age Pension (along with a high percentage of Australian pre-retirees), then some of those additional savings will benefit the government rather than you (by reducing its obligation to pay you the part Age Pension).

This means that it becomes important to form a view as to whether at retirement your assets will be:

1.         comfortably above the upper assets test threshold

2.         between the lower and upper thresholds, or only very marginally above the upper threshold

3.         below the lower assets test threshold.

Also, the choice to rapidly spend down assets to get more Age Pension has implications for your bequest under your will when you pass away. Obviously if you spend assets quickly when you are a young retiree, that will deplete assets compared with the situation where you conserve your assets and spend down only slowly and steadily in retirement. The ‘spend fast while young’ strategy can benefit your current income and consumption but will tend to leave a smaller estate. So before adopting such a strategy you might consider the strength of your bequest motive. If you have a strong desire to leave the largest possible inheritance to your beneficiaries, then you might spend money on a renovation or on upgrading your home (as these will be valuable assets when you pass away despite being outside the assets test) but you wouldn’t hold the party of a lifetime and invite 500 guests, nor would you throw your money away!

One final reason why you might decide not to ‘throw it away’ is that some future government might identify that the very high assets test taper rate is discouraging people from saving where their assets at retirement are likely to fall within the part Age Pension assets test range. In that case, the government might decide to reduce the assets test taper rate – but that may mean expanding the range of the assets test, perhaps by reducing the lower threshold again and increasing the upper threshold. In that case, the rationale for having divested yourself some of your assets might, at some future date, disappear – after you have already taken action to get rid of those assets! Unknown future changes to the Age Pension means testing rules make financial planning for retirement difficult for pre-retirees who expect to receive a part pension and for retirees who do currently receive a part Age Pension .

Are you likely to seek financial advice to determine your best approach? Will you follow strategies that will allow to qualify for a full or part Age Pension? Were you a ‘victim’ of the taper rate change in 2017?

Slow and Steady is available from John De Ravin’s website for $39.95.

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Written by John De Ravin

20 Comments

Total Comments: 20
  1. 0
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    (at least for the time being)!!!

  2. 0
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    I agree with some of those options, but am not sure people should be upsizing to get some extra Pension, nor give it away for same reason. We should be looking at less reliance on AP not more.

    • 0
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      McDaddy one benefit of ‘upsizing’ ie buying a home of significantly greater value, is that assets are preserved for your estate without any penalty. If adverse situations occur then the ‘new’ house can be sold, or used as security for a loan. This makes more sense than giving it away or frittering it away on travel or assets you do not necessarily want. I do not agree with your comment that we should be looking at ‘less reliance’ on the aged pension. The aged pension is just one ingredient of the retirement income cake.

    • 0
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      Eddy, we should as a society try and be more slef reliant and less on welfare etc. I take your point about the house etc, the Age Pension is seen as more of a safety net for people in future years. Less people in workforce in future will make it harder and harder to fund from taxes.

  3. 0
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    ‘Give it away’? Only of you do that more than 5 years before claiming any pension. Already know someone who did this, has been told not allowed, and will be 9 years before she can apply for pension.

    • 0
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      That doesn’t make sense. It’s only a 5 year wait max.

    • 0
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      Yes that was mentioned in the article with an example; if you are eligible for the pension at 67 give it away before you are 62, that’s the five years. Where you get 9 years from is beyond me.
      Also nothing stopping you, in the above example, to give away more then the $30K at say 65 years old. You can still apply for the pension (if eligible for any) and get a reduced payment until the five years is up at which time your pension is calculated on your ACTUAL balances at the time.

  4. 0
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    RETIREMENT IN AUSTRALIA.
    Mr Liberal & Mrs Labor Vote worked for the Department of Finance in Canberra as advisors to the Government.
    Due to a very tragic accident where both lost half their fingers & half their toes they where unable to count & perform their duties so were made redundant.
    Having no children & always holidaying internationally they decided to maintain this lifestyle in retirement. So with the funds from their redundancy & some super the bought a 1.5 million dollar penthouse in the CBD of Greensville. Not requiring a motor vehicle as they only travelled overseas & there was a public transport bus stop outside their door their non income assets were minor. So by using their super pension to fund their international travel they were able to keep their assets below $800,000 making them eligible for a part age pension with all the trimmings.

    Mr Jack & Mrs Joan Independent decided to stay in their 3 bedroom house in the burbs valued at $500,000 & continue their lifestyle of caravan holidaying in Australia as they had always done with their 3 kids. However their car & caravan where now 30 plus years old so decided to buy a new car & caravan which set them back $130,000 which left their financial assets at $800,OOO & precluded them from any government assistance.

    So my question is who are the better citizens the international travelers spending all their money overseas & getting some age pension or the couple who spend their money in Australia supporting local towns & communities & get SFA support is this fare.

    • 0
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      And please don’t mention Covit

    • 0
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      Clearly, you’re not expecting a serious answer. However, as former Publc Servants, in example one, they likely have a Defined Benefit pension and would be income tested. Therefore, they may not even receive any pension, or only a very small part pension. In terms of better citizen they may spend all their time helping the needy and not just traipsing around. Who are we to judge how people spend their own money. All the Jacks and Joan’s I know have actually woken up, and often with good financial advice make sure that they get a part pension

    • 0
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      Who are better?

      It’s not for anyone to judge.

    • 0
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      The better citizen no doubt would be Jack and Joan. The financially savvy ones are the international travellers. But Jack and Joan are now in minority because they feel shafted and got themselves better informed than ever before. Well we used to stay at van parks but now we stay in 4* hotels when we travel somewhere (not much choice these days). Do not punish the frugal as they will change when they open their eyes!

  5. 0
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    Very good article and highlights the maybe unintended consequences of Gov. meddling/ changing the rules … Every time they do this ..human nature looks for ways to minimize any negative impacts and maximize positive outcomes. Currently the 7.8% return benefit on reducing assets is almost a no brainier if you punt that any future and guaranteed meddling will be grandfathered.
    Couple of additional options are : Taking advantage of the Annuity discount available for some products ( refer Challenger)
    Downsizing Principal Residence if you qualify for the 10 year rule and recontributing.
    However all these options are so negative, when the Gov of the day should be looking at major structural reform with a view to establishing a universal pension system.
    No better time than now with Gov borrowings ( interest rates) so low and helicopter money being showered on nearly all sections of society… except pensioners.

    • 0
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      “unintended consequences”, haha, it was intentional. T Abbott and J Hockey made it that way to encourage people to spend, spend, spend to try to help the economy.

      People have short memories.

  6. 0
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    So you are saying $100’000 salted away in one of your children’s accounts (the one you can trust) means an extra $7800 per annum in the pension? Better than under the mattress where fire could destroy it. Of course in the computer age it would be hard to get it out from one account to another – so sell your chattels for cash only. Strange world we are living in.

    • 0
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      Well that COULD be done but the article never suggested that. It said to give it away to a beneficiary of your estate, so commonly give it to the kids who may need it now and they just get less at nighty night time. While you get that extra $7,800 income

  7. 0
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    The 2004 changes to the Parliamentary Contributory Superannuation Scheme (PCSS) which are very generous were grandfathered and remain so to this date.
    The 2017 changes to the Pensioner Assets Test were not grandfathered and are very punitive.
    Guess all pigs are equal but some pigs are more equal than others.

  8. 0
    0

    Universal aged pension, to stop all this financial finagling to meet the requirements. Tax everything above the pension amount. Less onerous on centerlink, easy to manage, and fair across the board


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