Benefits soften retirees' landing - Eureka Report article
Benefits soften retirees' landing
April 6, 2009
PORTFOLIO POINT: A bright note for retirees watching assets and interest rates fall is that they may be eligible for a pension or benefits.
There is no doubt the current market conditions are weighing heavily on the plans of investors, especially retirees, as they try to manage their investments. Share-based investments have halved in value, and income from cash and fixed interest investments have slumped with cash rates. The current cash rate of 3.25% barely keeps up with inflation, and further cuts are possible.
It's a tough environment, but one positive that retirees in Australia can take is that there are reasonable Centrelink benefits that provide a safety net to the income provided from their own assets. The most significant among these is the age pension or part-age pension for people with higher levels of investment and superannuation assets and income.
The age pension is a government payment (through Centrelink) that pays a benefit to people in retirement. For males, the qualification age is 65, and for females it is being scaled up to 65 depending on your date of birth (females aged between 63 and 65 should check their eligibility now).
Eligibility for the age pension is assessed under two tests: the "assets test" and the "income test", which determine entitlement to a full age pension, a part age pension or no age pension. Each test will calculate a different level of age pension, with the pension level being the lower of the two tests.
Most retirees are limited in their pension by the assets test. The assets test DOES NOT include the value of a person's principal place of residence. It does include your financial assets (superannuation, shares and cash) as well as lifestyle assets (furniture at replacement value, car, etc.) Retirees will be eligible for some part age pension if they:
- Are a home-owning couple and have combined assets of less than $882,500 (eligible for the full pension if less than $243,500).
- Are a non home-owning couple and have combined assets of less than $1,000,0007 of assets (eligible for the full pension if less than $368,000).
- Are a home-owning single and have assets of less than $555,750 (eligible for the full pension if less than $171,750).
- Are a non home-owning single and have assets of less than $680,250 (eligible for the full pension if less than $296,250).
These values are for the assets test from March 20, 2009.
Case study: assets test
To try and understand how the assets test might work, let us consider a retired home owning couple who are both aged over 65 and who, prior to the stockmarket fall, had a superannuation portfolio of $1,000,000 from which they were drawing $50,000 a year.
Let's assume that 80% of the portfolio was invested in shares (quite an aggressive asset allocation), and the portfolio is now valued at $600,000. Let us also assume that they have $20,000 of furniture and household assets, a $15,000 car and $5000 "tinnie" and $10,000 held in cash outside of superannuation.
They would have total assets for the Centrelink asset test of $650,000 (being $600,000 super/pension assets plus $10,000 cash plus $20,000 furniture and $20,000 car and boat).
The amount of age pension paid is $1.50 per fortnight for every $1000 the couple is under the limit. This couple, with $650,000 of assets, is $232,500 under the limit for a home owning couple of $882,500. The fortnightly age pension will be (232,500/1000) x 1.5 = $349 per fortnight or $9070 per annum).
It is easy to see the importance of this age pension in the couple's situation: the extra $9070 gives them a second source of income on top of their superannuation assets, and might allow them to reduce their drawings on those assets, making it less likely they will have to sell growth assets whose value has fallen sharply. Further, it is worth keeping in mind that the minimum compulsory pension drawings from super have been halved for the current year. This allows the couple in this case study to draw more slowly on their superannuation assets while they are receiving some part-age pension.
Separately, in relation to income tests: A couple have income of up to $68,484 and still receive some part-age pension, a single person can earn $41,015. However, in most cases only a portion of the income received from a superannuation pension will count toward the income test. Because of this, most people find the assets more restrictive than the income test and are limited by that test.
My advice would be to work out your situation based on the income test, and then contact Centrelink Retirement Services on 13 23 00. The income test is more technical; both the calculation of a superannuation pension stream and the "deeming" calculation for your other financial assets are more complex. However, if you are eligible under the assets test I think that it is 80% likely that you will be able to receive some part-age pension, and that means that discussing this with Centrelink makes sense.
Note: There are more generous income and asset test thresholds for couples separated due to illness so keep this in mind if it might apply.
Health Care and Concession Card
One of the benefits of receiving some part-age pension is access to a Pensioner Concession Card. This includes some medical benefits, as well as benefits offered by state and local governments.
The Commonwealth Seniors Health Card may be available to people of age pension age, even if they do not qualify for any age pension. The income threshold for the card is $80,000 for a couple and $50,000 for singles. The benefits may include discounts on medication, telephone allowance, senior's concession allowance and other discounts offered by state or local governments.
For those who are in or moving closer to retirement, this economic downturn has a significant impact. People closer to retirement are likely to have a higher level of investment assets, so they are more likely to have lost more money that other people. Further, they are closer to having to rely on their investments to fund their lifestyle, just at a time when growth assets have halved in value, the second biggest fall in Australia's history (behind the 60% sharemarket fall in the early 1970s).
If there is a saving grace, it might just be that the Australian age pension system is relatively generous, and people facing large falls in portfolio values may be able to supplement their superannuation income with some part-age pension.
Further, there are additional benefits from both the Pensioner Concession Card and Seniors Health Care Card that have value for people in retirement.