The headline changes to retirement planning have all revolved around superannuation - there has been much written about the rush to make $1 million superannuation contributions prior to the end of last financial year. There is, however, a retirement planning story that will affect far more Australians, and that is a change that will allow more people to access some age pension in retirement. (After all, there are only so many of us with a million dollars sitting around to be put into superannuation.)
For more Australians the story is the change to the assets test that is used to calculate whether you are eligible for the age pension, and how much pension you are eligible for. The change means people will be able to have a significantly higher level of assets and still be eligible for an age pension, or a part age pension, in retirement. This change in the assets test takes place on the 20 September 2007.
This asset test change is a significant change to the retirement planning landscape, and should be something that people who are retired or people who are looking ahead to retirement should be aware of.
Before going too far into the article, it is important to point out that this is general advice only. There are more issues to be discussed in the issue of retirement planning that we can touch on in this short article, and you should seek further advice before acting on any part of this article.
The basics of the Age Pension
The basic requirements to be eligible for the age pension are that:
· You must be 65 years of age for men. For women the age requirement is being scaled up to 65 as well - although some women retiring now may be eligible before age 65
· You must be an Australian Resident
· You must have income below an income test, and assets below an assets test
The amount of the full age pension is $525 a fortnight for a single person and $439 a fortnight for each member of a couple. This is $13,650 a year for a single person and $22,828 in total for a couple.
However, there are many people who have assets or income levels that mean that they receive a part age pension.
The Income and Assets Test
There are two tests that sit behind the age pension and are significant in calculating how much age pension a person is eligible for - if they are eligible at all. A person calculates how much age pension they are entitled to under each test, the income test and the asset test, and then receives the lowest amount of age pension. For example, if the asset test suggested that they would be eligible for $9,000 of age pension and the income test $11,000 they would receive the $9,000 of age pension.
The first test is the income test. A couple can earn up to $63,414 worth of income and a single person $37,940 worth of income and still receive some age pension. It is generally considered that the income test is more lenient than the assets test - and therefore it is more relevant to focus on the assets test as it is this test that will limit most people's access to the age pension.
With the assets test currently, a homeowning couple can have up to $531,000 of assets (excluding the value of their home) and still receive some part age pension. Under the proposed changes, the Centrelink publication entitled 'Pension Rules are Changing - Are You Eligible?' says that homoeowning couples will be able to have up to $825,500 of assets (excluding the value of their home) and still receive some age pension.
With the assets test currently, a homeowning single person can have up to $343,750 of assets (excluding the value of their home) and still receive some part age pension. Under the proposed changes, the Centrelink publication entitled 'Pension Rules are Changing - Are You Eligible?' says that homoeowning single person will be able to have up to $520,750 (excluding the value of their home) and still receive some age pension.
A homeowning couple can have up to $236,500 in assets and still receive the full age pension, and a homeowning single can have up to $166,500 in assets and still receive the full age pension.
At this stage we should look further at the assets test, and what is included in it. While it excludes the value of your home if you are a homeowner, it includes:
· All of your home contents
· Cars, boats caravans
· Holiday or rental homes
· Value of a business
· Some superannuation investments
· Loans (including family loans)
· Gifts that you have made
These asset test changes will affect two groups of people.
Firstly, there will be a group of people who have assets that put them over the current assets test and who currently receive no age pension benefits. However, after the changes they may now be eligible for some age pension benefits.
For example, let us consider a homeowning couple with $600,000 of assets (not including the value of their home). Let's assume that they are currently eligible for the age pension except for the fact that they currently they have too many assets for the Centrelink assets test, and therefore do not receive any age pension now. With the change to the age pension tests they are now under the $825,500 maximum age pension assets test (for homeowning couple). This couple can now (from the 20 September 2007) receive $335 a fortnight in age pension benefits. This assumes that they satisfy the income test criteria. As mentioned earlier, it is the asset test that tends to limit the amount of pension income received. $335 a fortnight is a reasonable amount of extra income, and there is nothing else that needs to be done to claim this.
The other group of people who will be positively impacted by this change are those people who are currently receiving some part age pension now, and who will receive an increase in the part age pension when the asset test changes.
The Practical Steps - How to claim the Age Pension and find more information
Centrelink are the administrators of the age pension benefits. They also have a number of sources of information for people how are considering retirement planning issues.
There is a brochure that they have available entitled 'Pension Rules are Changing -Are you Eligible?' (I think that it is a really good starting point for more information on this topic).
This is available on their website at the address included below.
The general Centrelink website is www.centrelink.gov.au
You can also call the Centrelink Financial Information Service on 132300.
There are also Centrelink Customer Service Centres.
Introduction to more advanced strategies
This is only a very brief introduction to some more advanced strategies that exist around these age pension asset test changes. It would be very important to seek further personal advice as to the suitability of these strategies for your situation.
Up until the 20 September 2007 there are some superannuation income streams available that provide a 50 per cent asset test discount. The most common of these is a 'Term Allocated Pension'. These income streams are more restrictive than other superannuation income streams, for example they don't allow you to take lump sums from them, however they may allow you greater access to age pension benefits. It may be worth starting one of these income streams, or rolling over an existing superannuation income stream into one of these, to increase the level of age pension received in retirement.
People who are over the age of 55, and think that they may be able to access some age pension benefits in the future, may choose to start a 'transition to retirement' income stream even though they are working and use a superannuation income stream that has a 50 per cent asset test discount, such as a Term Allocated Pension. They would do this so that in the future (after age 65), they would be eligible for a higher level of age pension benefits.
The changes to the asset test for the age pension are a significant change to the retirement planning landscape. They will increase the level of part age pension received for many people, and allow others to receive a part age pension when previously they were not eligible.
For those people contemplating retirement, the ability to accumulate a higher level of assets and still receive age pension benefits provides and incentive to start planning and investing for a higher quality of retirement.
There remains, up until the 20 September 2007, the opportunity to start or transfer assets to a more restrictive superannuation income stream such as a 'Term Allocated Pension' which allows the value of the income stream to receive a 50 per cent discount for asset test purposes. People over the age of 55, who are still working, may want to look into starting one of these income streams under the 'transition to retirement' rules.
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