Stricter means test a tax on retirees

The heavy ‘tax’ imposed by the Coalition’s toughened Age Pension means test will adversely affect even those with average super balances, according to new research from Betashares in a report published in The Australian.

The income and assets test is designed to coerce retirees into spending more of their retirement savings or invest in risky assets, says the exchange-traded funds provider, whose research questions the validity of Australia’s retirement income system.

Retirees with super balances between $350,000 and $600,000 would derive less income from having these retirement savings than they would if they were on the Age Pension with less than $263,250 in savings.

For each $1 of income a fortnight above $174, the Age Pension payment is reduced by 50c, which Betashares senior investment specialist Roger Cohen refers to as “an effective tax rate for a retiree of 50 per cent”.

From 1 January 2017, the assets test reduces the pension by $3 a fortnight for every extra $1000 in super, which was up from $1.50 before the changes.

Based on the income test alone, someone with $350,000 in superannuation would be deemed to receive $543 a fortnight in income – $369 over the full-Age Pension threshold. When taper rates come into effect, he or she would lose $184.50 in pension.

Similarly, a person with $600,000 in superannuation would be deemed to earn $832 a fortnight and would lose $658 off the full-Age Pension rate.

“Because the pension is means-tested, increased wealth of superannuation assets does not automatically translate to a retiree being better off with more income,” stated Dr Cohen in his analysis.

“The system results in a strong incentive to either spend, or to move investment towards ultra- high-potential returns, with resultant increased risk.

“For a retiree caught in the ‘retirement trap’, additional assets are better off spent, or if they are invested, must generate returns that are well in excess of 7.8 per cent per annum to exceed the pension entitlements that are lost.”

According to 2018 ABS data, the average super balance for men aged between 54 and 74 was $446,000 and $378,000 for women the same age.

“Common wisdom tells us that accumulating more savings through our working lives should result in higher income in our retirement years. However, our analysis shows that for certain people, under the current system accumulating more money can actually produce the reverse,” said Dr Cohen.

“Without considering the eventual policy changes from the retirement income review, our research shows people in retirement can only escape the ‘retirement trap’ if they accumulate an asset base well over half a million dollars.”

Do you think the means test should change? Have you found the toughened test a hindrance to a happy retirement?

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Tax changes for older workers

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