New retiree assets test this year

Last year, we experienced considerable volatility in the stock market, with the All Ordinaries Accumulation Index – which takes into account both price movements and dividends – down two per cent for the 12 months.

This decline eventuated even after factoring in the running yield of around 4.5 per cent.

It’s a reminder that it’s normal for the share market to give us four negative years out of every 10, which means we can still look forward to six positive years every decade.

As always, my advice is to hang in there for the long term.

There is a federal election due by May, and if we can believe the bookmakers, the Labor Party is going to win. If it does, and its legislation to prevent a refund of franking credits is passed, it will be important for self-funded retirees to adjust their portfolios to make up for the yield that will be lost if excess franking credits are no longer available.

There is no need to panic – any changes are many months away, which gives us plenty of time to recommend strategies to defeat the tax grab.

Many retirees spend far too conservatively after they retire because they have no idea of how long they’re going to live. This is why I urge you to go to the website and complete the short online questionnaire that will give a good estimate of the number of years you are likely to have left.

Of course, the results are not guaranteed, but the questionnaire is well researched and if nothing else is a great tool for discussion. The results could be especially useful if it appears that one partner will live many more years than the other.

Keep in mind that the Centrelink treatment of lifetime income products is changing dramatically from 1 July this year. The official term is “asset-tested income stream (lifetime)”. If you take out one of these products after 1 July, only 60 per cent of the purchase price will be assessed for the assets test up to age 84 (or for a minimum of five years) and 30 per cent thereafter.

Consider this case study: A couple aged 70 has $800,000 in assessable assets and receives a tiny Age Pension. If they used $200,000 to buy a lifetime income product, their assessable assets would reduce by $80,000 and their pension would increase by $6240 a year.

Challenger advises me that this $200,000 could provide an indexed lifetime guaranteed annuity for him of $6196 a year and for her of $5882 a year. The combination of the increased Age Pension and the income from the two annuities would give them a guaranteed income of $18,318 in the first year. That could make a huge difference to their financial situation.

The reduction in assessable assets could also give them a valuable safety buffer if Labor’s proposal to abolish the refund of franking credits to non-pensioners becomes law. This is because a portfolio generating franked dividends could increase in value and make them ineligible for the Age Pension.

At this stage, only full or part-pensioners are exempt from Labor’s proposal.

This is the perfect time to review your wills and also ensure you have given one or more trusted persons enduring powers of attorney.

As well, you should have prepared an advance health directive if appropriate. It’s most important that your family know the location of these documents because often circumstances arise where they are needed urgently.

And keep in mind the ‘death tax’ of 15 per cent plus Medicare levy that is calculated on the taxable component of your superannuation left to a non-dependant. The best way to legally avoid this tax is to ensure your attorney has instructions to withdraw all your superannuation tax-free and place it in the bank if it is obvious that death is imminent.

Most retirees tend to leave their assets to the surviving partner, but this can cause serious problems if that person is an age pensioner. This is because the asset test cut-off for a couple is $848,000 but for a single it’s $564,000.

Think about a couple with assessable assets of $830,000, which include a large share portfolio paying franked dividends. If one of them died, and the assets were left to the survivor, the survivor would find him or herself way over the cut-off point for the asset test, and lose the Age Pension and franking credits, as well as their beloved partner.

Do you have a question you’d like Noel to tackle? Email us at [email protected]

Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature, and readers should seek their own professional advice before making any financial decisions.

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Noel Whittaker
Noel Whittaker
International bestselling author, finance and investment expert, radio broadcaster, newspaper columnist and public speaker, Noel Whittaker is one of the world’s foremost authorities on personal finance. He is currently an Adjunct Professor and Executive-in-Residence with the Queensland University of Technology, as well as a committee member advising the Australian Securities and Investment Commission.
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