Tuesday night’s Federal Budget contained a number of changes for all retirees, whether they be self-funded or reliant on the Age Pension.
There were four key changes aimed squarely at older Australians. They included: improving the Pension Loans Scheme (PLS), extending access to downsizer contributions, repealing the work test for some super contributions and providing the option of moving out of legacy retirement products.
Improving the Pension Loans Scheme
From 1 July 2022, the government will introduce a ‘no negative equity guarantee’ for PLS loans and allow people to access a capped advance payment in the form of a lump sum.
A ‘no negative equity guarantee’ will mean that borrowers under the PLS, or their estate, will not owe more than the market value of their property, in the rare circumstances where their accrued PLS debt exceeds their property value. This brings the PLS in line with private sector reverse mortgages.
Eligible people will be able to receive a maximum lump sum advance payment equal to 50 per cent of the maximum Age Pension.
Based on current Age Pension rates, this is around $12,385 per year for singles, while couples combined could receive around $18,670.
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A maximum of two advances totalling up to the cap amount are permitted in a year, for those who do not want to take an advance in one instalment.
Paul Rogan, the founder and chief executive of Pension Boost, a company dedicated to helping people access the PLS, welcomes the changes to the system, saying it would allow retirees to live in their homes for longer.
“Many home-owning retirees are cash strapped as they did not have the full benefit of superannuation when working and a lump sum could be used to modify their houses to prepare for living there when people are less mobile,” Mr Rogan explained.
“Having cash available for lumpy expenses experienced by seniors, for example, car repairs or modifications to enable living in their homes would overcome one of the major barriers to the uptake of the Pension Loans Scheme.”
The Association of Superannuation Funds of Australia (ASFA) chief executive Dr Martin Fahy said the changes to the scheme could improve living standards for many retirees.
“Broader innovation in reverse mortgage products has the capacity to improve consumer outcomes by increasing competition and lowering costs,” said Dr Fahy.
Read more: What’s in the Budget for you?
Repealing the work test
Treasurer Josh Frydenberg says the government will amend the work test rules to allow retirees who have not had the benefits of compulsory superannuation throughout their working lives to get more out of the system.
From 1 July 2022, individuals aged 67 to 74 will no longer be required to meet the work test when making, or receiving, non-concessional superannuation contributions.
These individuals will also be able to access the non-concessional bring forward arrangement, subject to meeting the relevant eligibility criteria.
Access to concessional personal deductible contributions for individuals aged 67 to 74 will still be subject to meeting the work test.
Read more: Federal Budget hits and misses
Extending access to downsizer contributions
From 1 July 2022, the minimum age for the downsizer contribution will be lowered from 65 to 60. This will allow Australians nearing retirement to make a one-off post-tax contribution of up to $300,000 per person (or $600,000 per couple) when they sell their family home.
The government hopes the measure may encourage people to downsize sooner and increase the supply of family homes, while also allowing greater flexibility for Australians to contribute to their superannuation.
Downsizer contributions can be made after the sale of a person’s principal place of residence, held for a minimum of 10 years.
Read more: Social media reaction
Legacy product conversions
The government will provide a two-year period for consumers to convert market-linked, life-expectancy and lifetime pension and annuity products into more flexible and contemporary retirement products if they want to make the change.
It will not be compulsory for these products to be converted, but it does allow retirees the option of accessing their capital or being more flexible with the drawdowns.
Retirees with these products can choose to completely exit them by fully commuting the product and transferring the underlying capital, including any reserves, back into a superannuation fund account in the accumulation phase.
From there, they can decide to commence a new retirement product, take a lump sum benefit, or retain the funds in that account.
Any commuted reserves will not be counted towards an individual’s concessional contribution cap and will not trigger excess contributions. Instead, they will be taxed as an assessable contribution of the fund (with a 15 per cent tax rate), recognising the prior concessional tax treatment received when the reserve was accumulated and held to pay a pension.
While the conversion of the legacy product will mean that the income and assets test for the Age Pension will apply to the new product, the test will not apply retrospectively to the product for the period before the conversion.
The conversions will be available for market-linked, life-expectancy and lifetime products that were commenced before 20 September 2007 from any provider, including self-managed superannuation funds.
Flexi-pension products offered by any provider, and lifetime products offered by a large APRA-regulated defined benefit schemes or public sector defined benefit schemes, will not be included.
The government provided three examples for how the product conversions will work.
Example 1: Allowing access to reserves
Jill is 80 and has a lifetime pension provided by her self-managed super fund (SMSF).
The lifetime pension, which commenced in 2003, has set annual payments and an associated reserve that supports the pension.
Jill thinks that this product no longer suits her needs as she wants to be able to access her superannuation capital as required.
She commutes the pension including the reserve back into an accumulation account in her SMSF before commencing an account-based pension with all the proceeds.
The reserves transferred back to accumulation will be included as assessable income for her SMSF on which she will pay up to 15 per cent tax.
Jill has space in her transfer balance cap to start her new account-based pension.
As the new amount of the account-based pension counts towards the Age Pension assets test, Jill’s part age pension payment rate will be re-assessed.
She now has immediate access to all the capital that was supporting the legacy product and more flexibility in how she draws down her superannuation.
Example 2: Interactions with the transfer balance cap
Mark is 75 and has a market-linked pension that first started in 2005.
He commutes the market-linked pension back into an accumulation account, before commencing an account-based pension with some of those proceeds.
However, Mark cannot move all the proceeds into an account-based pension because he does not have enough space in his transfer balance cap account.
He retains the rest of the proceeds in the accumulation account, where earnings are taxed at a rate of up to 15 per cent.
Mark decided the exit is worthwhile to gain extra flexibility in accessing his superannuation and he will continue to receive a part age pension payment that will remain relatively unchanged.
Example 3: Social security treatment
Roberta is a 70-year-old single retiree who has a life-expectancy pension, with no reserve, that first commenced in 2007.
She commutes the pension back into an accumulation account with a non-SMSF provider. She then starts an account-based pension with the full balance as she has sufficient space under the transfer balance cap.
Roberta was primarily exiting to give herself the option to access the monies as tax-free lump-sum benefits should she need to do so. Her Age Pension payments also increase because of the conversion. This is because Roberta’s Age Pension amount is being set by the income test, and the deemed income on her new account-based pension is more favourable (a lower amount) than the income from her former life-expectancy pension.
Mr Frydenberg also reaffirmed the commitment to increase the superannuation guarantee to 12 per cent by 2025 and abolished the $450 a month earning threshold for the payment of the superannuation guarantee, which received widespread praise.
Dr Fahy said the changes were an important step towards providing adequate retirement savings.
“Australia’s superannuation system enables Australians to retire with dignity,” Dr Fahy said. “With the legislated increase of the superannuation guarantee to 12 per cent, and a maturing superannuation system, we expect to see a greater proportion of retirees relying less on the Age Pension and more on their retirement savings.”
What do you think of the superannuation changes in Tuesday’s Budget? What changes will benefit you most in retirement?
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