Retirees’ handy bonus
By Scott Francis
May 11, 2011
PORTFOLIO POINT: The work bonus detailed in the budget adds to the government’s theme of flexibility for retirees.
One of the most overlooked announcements from the 2011 budget was the “work bonus”, which gives retirees the option of boosting their retirement savings by $6500 each year before their pensions are affected.
This initiative – which was admittedly confirmed beforehand – is part of an increasingly flexible retirement landscape. Treasurer Wayne Swan introduced this in his budget speech saying, “For seniors, our work bonus now allows an extra $125 a week of earned income before their pensions are affected.”
This effectively encourages an age pensioner to do some part-time work by granting increased capacity to earn some income without it affecting their pension. It also fits nicely into a bigger theme of retirement planning where retirees can blend a mix of superannuation, work and the age pension to fund their lifestyle.
The other initiatives that combine to deliver this more flexible retirement situation include:
The first of these strategies – the transition to retirement income stream – means that most people from the age of 55 will start an income stream using their superannuation assets to partly fund their cost of living, while salary-sacrificing surplus income back into their superannuation account.
The benefit of this strategy is that for an average income earner, they are likely to be able to significantly reduce the amount of tax that they pay.
In addition to these benefits, changes to the assets test for the age pension – available to those over 65 – deliver additional flexibility. The details of the changes are as follows:
- Transition to Retirement income streams, which encourage people to withdraw money tax-effectively from superannuation while salary-sacrificing income to superannuation, to save tax and build superannuation assets.
- Recent increases to the age pension assets test, which allow people to have more assets than ever before while still receiving some age pension.
- The introduction, from July 1, 2011, of the “work bonus” that allows a person to work and earn an extra $125 a week of income.
This allows retirees even more opportunities than in the past to build investments – perhaps inside a self-managed superannuation fund – and still receive some part age pension. Let’s consider a home owning couple of age pension age with:
- A home owning couple can now have up to $991,000 in assets (excluding the value of their home) and receive some part age pension.
- A non-home owning couple can now have up to $1.126 million in assets and receive some part age pension.
- A home owning single can now have up to $668,000 in assets (excluding the value of their home) and receive some part age pension.
- A non-home owning single can now have up to $799,500 in assets and receive some part age pension.
- House valued at $650,000.
- Lifestyle assets of $50,000.
- SMSF valued at $800,000 delivering an income of $40,000 per annum.
Under the current age pension test rules, they will receive $211.50 a fortnight in age pension – or about $5500 a year. If they are drawing on their superannuation assets at a rate of about 5% a year, or $40,000 a year, this couple will receive tax-free income of $40,000 from their self-managed super fund and an additional $5500 from the age pension to have a total of $45,500 a year – tax-free – to fund their retirement.
This brings us to the changes coming up from July this year – the ability to earn an extra $125 a week without it impacting on their part age pension. An important aspect of this work bonus scheme is that if the extra income is not earned in any fortnight, the capacity to earn income is carried forward and can be earned in the future without affecting the age pension.
What this means that if a person earns up to $6500 in any period during a year – whether that is $125 every week or $6500 over six weeks – it will be excluded from the age pension assets test.
Looking at the scenario above – a retired couple with $800,000 of superannuation assets, giving them a $40,000 superannuation income stream and $5500 of the government age pension – one member of the couple can do some part-time work to earn another $6500 without any impact on their pension situation (In reality, they can do more work that this – the $6500 a year illustrates the basic work bonus level).
Their income situation is now:
The work bonus announced prior to the budget, and highlighted again last night, extends the theme of greater flexibility for people around retirement and in the situation we have outlined the additional $125 a week has delivered a 16% increase in the annual spending power of our fictional retirees.
The breakthrough development was the transition to retirement income streams, which allowed people to tax-effectively build assets leading up to their retirement. This was followed by a significant increase in the assets test for the age pension – where a couple who own their own home can now have almost $1 million in assets and still receive some part age pension in retirement. The work bonus scheme is the final piece of the puzzle.
- Superannuation income $40,000
- Government age pension $6,500
- Part-time work (work bonus level) $6,500
- Total income (tax free) $53,000