With the 1 January 2017 Assets Test changes less than 1 month away, it is important retirees who may be over the estimated Assets Test cut-off at that time understand the implications on their Age Pension entitlements. It is also important for all retirees to review their spending plans in light of how these changes impact their retirement over the longer term.
A recap of what is changing
The rebalanced pension Assets Test on 1 January 2017 will:
1. Higher Assets Test thresholds
The first of the changes is an increase in the Assets Test thresholds. This allows retirees to hold more assets before their pension starts to reduce under the Assets Test. For some retirees with lower asset levels, this may lead to higher pension entitlements. For others, the Income Test will continue to determine their entitlements.
Table 1: Assets Test thresholds
||Assets Test threshold as at 20 September 2016
||Assets Test threshold from 1 January 2017
| Single, homeowner
| Single, non-homeowner
| Couple, homeowner
| Couple, non-homeowner
2. Increasing the Assets Test taper rate
The second change is an increase in the taper rate. This change will reduce Age Pension entitlements at a faster rate once assessable assets exceed the new Assets Test thresholds. The largest reduction in pension entitlements will occur at the new Assets Test cut-off thresholds (Table 2). Pensioners with assessable assets above the new cut-off will see their pensions reduce to nil.
Table 2: Assets Test cut-off thresholds
||Current cut-off thresholds as at 20 September 2016
||Cut-off thresholds at 1 January 2017
Case study: quantifying the impact on your retirement
Bruce, aged 68, and his wife Anne, aged 66, run their own self-managed super fund (SMSF). In November 2016 they have $20,000 in personal assets, they own their home and have $750,000 in total household savings they are using to fund their retirement:
They currently plan to spend $58,000 per annum in retirement increasing with inflation to maintain their standard of living, and they also estimate their spending needs will reduce by 30% when the first of them passes away.
Under the current Age Pension rules Bruce and Anne are receiving an Age Pension entitlement of $612.15 per fortnight. Their entitlement is being determined under the Assets Test and post 1 January 2017 their Age Pension entitlement is expected to reduce by $474.75 to $137.4 per fortnight.
The following charts illustrate an example projection of Bruce and Anne’s retirement using fixed assumptions for investment returns and how long they will live.
The first chart shows how their retirement spending is funded each year and the second chart breaks down their total lifetime spending over retirement into initial capital, earnings and Age Pension entitlements until Anne is age 91 when in this scenario we assume both persons have passed away.
The first chart above illustrates that the amount of Age Pension Bruce and Anne might have received under the current rules would have gradually increased over their retirement as they spend down on their savings. Whilst Bruce and Anne’s Age Pension entitlement under the new rules is significantly lower at 1 Jan 2017, the higher taper rate means that their Age Pension entitlements increase more quickly as they spend their savings.
Despite the expected $474.75 fortnightly reduction in Age Pension at 1 January 2017, Bruce and Anne’s estimated total lifetime Age Pension entitlements reduces by less than 2% as a result of the new rules. Whilst the timing of when they receive their Age Pension entitlements changes, the overall amount they receive over their retirement is actually very similar. The higher drawdown on their savings at the start of their retirement does mean that Bruce and Anne’s would have around 20% less capital remaining at the end of their life expectancy under this scenario.
The above analysis considers just one market scenario. If we test Bruce and Anne’s retirement through 2,000 market and lifespan scenarios we can determine the confidence they can have that their retirement spending will be sustainable for life. Retirement is considered to be sustainable if there are sufficient assets to maintain their desired lifestyle for the rest of their lives.
We compare the level of confidence they would have in their retirement spending plans pre and post the 1 January Assets Test changes below.
The Age Pension changes have reduced the probability that Bruce and Anne’s savings will last as long as they do by 5%.
Is it worth spending some savings to maintain your Age Pension?
If Bruce and Anne wished to continue receiving the same amount of Age Pension under the new rules as they do today they would have to reduce their assessable assets by approximately $158,000 prior to 1 January 2017. These assets would need to be spent or invested in non-assessable assets such as the family home in order to not count towards the Age Pension means tests.
However, spending a sizable portion of their savings now in order to boost their Age Pension entitlements would have a significant impact on the sustainability of their retirement plans. It would increase the chance of them outliving their savings by around 17%, with their confidence level falling from 81% to 64%.
Despite many retirees likely to face a significant reduction or loss of Age Pension from 1 January 2017, when looked at from a broader perspective the biggest change is likely to be the timings of when payments are received rather than the overall level of entitlements. It may not be necessary to make significant reductions in living standards or large changes to savings in order to maintain a sustainable retirement plan.
Important information: This article constitutes information only and has been prepared without taking account of the objectives, financial situation or needs of any particular individual. The case study is illustrative only. The article does not constitute financial advice. Social Security entitlements are only one consideration when making a financial decision. Anyone should, before acting, consider the appropriateness of the information in regard to their objectives, financial situation and needs and, if necessary, seek professional advice.
First published on Switzer Super Report 24 November 2016
The information in this document is provided by Accurium Pty Limited ABN 13 009 492 219 (Accurium). It is factual information only and is not intended to be financial product advice, tax advice or legal advice and should not be relied upon as such. The information is general in nature and may omit detail that could be significant to your particular circumstances. While all care has been taken to ensure the information is correct at the time of publishing, superannuation and tax legislation can change from time to time and Accurium is not liable for any loss arising from reliance on this information, including reliance on information that is no longer current. Tax is only one consideration when making a financial decision. We recommend that you seek appropriate professional advice before making any financial decisions.