The law of unintended consequences

You may have heard of the law of unintended consequences. This is the universal law which states that when you actually do something for all the right reasons, something always happens as a result of your actions that actually makes matters worse.

As an example, in Victoria in 1990 it was made mandatory for all bicycle riders to wear a safety helmet. This seems a very sensible law which has resulted in a reduction in the number of head injuries. However, this law had the unintended consequence of reducing the number of juvenile cyclists due, in part, to youths considering it unfashionable to wear a helmet. Fewer cyclists obviously leads to fewer injuries, all things being equal. In fact, research by Macquarie University in Sydney suggests that whilst wearing a helmet reduces the risk of head or brain injury by approximately two-thirds, the decrease in exercise caused by reduced cycling as a result of the helmet laws is counterproductive in terms of net health.

So what has this to do with financial planning? Well, the law of unintended consequences commonly occurs when navigating the Australian tax and social security system. The transition to retirement strategy is a good example.

Consider Bob (aged 61) and his wife, Sue (aged 65). Bob is still working full-time earning $50,000 p.a. whilst Sue has retired. They own their own home with no mortgage.

Bob’s superannuation is still in accumulation phase and is valued at $400,000. Sue has commenced an account based pension with her superannuation and it is also valued at $400,000. They also have some shares and cash valued at $300,000 along with two cars and home contents worth $30,000.

At the moment, since Bob’s superannuation is in accumulation phase and he is under his retirement age, it is treated as an exempt asset for Centrelink purposes when determining Sue’s entitlement to the Aged Pension. In fact, Sue qualifies for a small part, Aged Pension of approximately $100 per fortnight and, importantly, also receives a Pensioner Concession Card.

However, Bob would like to move to part-time employment, and has read about the advantages of using a transition to retirement strategy to help achieve this goal. He decides to move his superannuation into a transition to retirement pension and draw down the minimum income allowable of three per cent (i.e. $12,000 p.a.). This income enables him to move to four days a week in his job and maintain enough income to meet his expenses. The income from the pension is tax free, and doesn’t impact on the Centrelink incomes test as it is less than his deductible amount and the funds in the pension can now grow in a completely tax free environment. All seems good; however, now the law of unintended consequences appears. As Bob’s superannuation is now in pension phase, the value of his fund is now included in the Centrelink asset test when determining Sue’s entitlement to the Aged Pension. This results in Sue no longer qualifying for her Aged Pension and her Pensioner Concession Card is cancelled.

Bob, after recovering from the wrath of his wife, decides to see a financial planner who prepares an alternative strategy which only moves part of his superannuation into a transition to retirement pension, enabling him to still move to part-time employment and reinstating Sue’s part Aged Pension and Pensioner Concession Card.

Richard Shermon, Reserve Financial Consulting

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