Pension changes will spark a retirement rethink

Retirees will need to save more or be more proactive about managing their assets

Pension changes spark a rethink

Older Australians need to rethink their retirement planning to maximise their gains and minimise losses flowing from last week’s Federal Budget.

While the government scrapped its previous plan to slow the increases of age pension payments, big changes to the pension assets test will deliver winners and losers and open the door to some new strategies.

From January 2017, single homeowners will qualify for a full pension if their assets are less than $250,000 — up from $202,000 today. For couples the new figure will be $375,000 rather than today’s $286,500. However, the rate at which the pension reduces after that level will double and result in 91,000 people no longer receiving a pension.

About 235,000 retirees will received a reduced pension, 170,000 will receive an increase averaging $30 a week and 50,000 part-pensioners will move to a full pension.

The family home is not counted in the assets test, which makes it a great place to hold retirement wealth if you’re on the wrong side of the new assets test thresholds.

Prescott Securities economist and adviser Alan Hutchinson says it would be a bad idea to live in a small, cheap unit while owning a pile of other assets that get assessed by Centrelink.

He says retirees withdrawing equity from their home — rather than selling the home outright — may become more popular, through programs such as the Federal Government’s Pension Loans Scheme for part-pensioners.

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“The Commonwealth Seniors Health Card is a big issue. For a lot of people the health card is worth more to them than the part-pension,” Hutchinson says.

The Budget papers say current part-pensioners will retain their health card — and its attached benefits such as cheap medicines — even if the asset test changes stop their pension.

Scott Girdlestone, a wealth advisory director at William Buck, worries that retirees may reduce their assets with unnecessary spending and poor financial decisions.

“What will happen is people are going to consume more of their own assets and they will have a much higher dependence on the age pension moving forward,” he says.

Home renovations, holidays and gifting money to family members are some ways to reduce assessable assets. Gifting strategies need to be planned early because any money given away is still assessed by Centrelink for five years, Girdlestone says.

“Any significant changes to your home need to be balanced by the quality of life you want to have,” he says.

SuperGuardian CEO Olivia Long also warns about rushing into strategies around assets without taking advice. “They should avoid any knee-jerk reactions such as moving their wealth from means-tested assets to non means-tested assets,” she says.

The CEO of the Association of Superannuation Funds of Australia, Pauline Vamos, says the pension changes mean a couple would have to save an extra $120,000 for a comfortable retirement, up from $510,000 to $630,000.

“This assumes that they draw down entirely on their capital, and receive a part-pension as their assets decrease,” she says.

“Given that the purpose of superannuation is to provide an income in retirement, it is reasonable to expect people to draw on their capital until their savings are exhausted, and not just rely on income generated from their account’s earnings.”