Savage pension swipe will come as a Christmas surprise for many

A ferocious backlash against the introduction of shortsighted pension changes is set to besiege the PM come Christmas.

PM Turnbull and Treasurer Scott Morrison leave at the end of Question Time in the House of Representatives, Federal Parliament, Canberra.

My advice to Prime Minister Malcolm Turnbull and Treasurer Scott Morrison is to take their Christmas holidays early and don’t come back until well into January.

And make sure you can’t be easily contacted because from mid-December to mid-January the government faces a fire storm of enormous proportions.

In mid-December, some 313,000 middle class Australian savers will be told that their government pensions are to be savaged and that they will have to adopt a completely new financial plan.

Let’s assume that each one of those Australians has two close family members or friends, so, there will be at least one million Australians white hot with anger.

But it gets worse because the changes were designed by remote Canberra public servants who have little knowledge of the way retirees think and act (outside those on gold-plated public service pensions). As a result, the badly designed measures will substantially increase Australia’s long-term pension bill.

When I explain the detail later in the commentary it will be apparent to all financially literate Australians that these measures raise money for only a few years. Then they become a big cost.

I am grateful to retired chartered accountant Robert Parry for alerting me to what is about to happen.

It’s no surprise that the pensions are being treated with the same retrospectively applied savagery that was imposed on those saving via superannuation because these pension measures are designed to hit those with reasonable, but not huge, superannuation savings. It would seem both attacks were designed by the same people.

The superannuation movement fought and won. It’s only recently that the savagery of the pension attack was understood.

Few young journalists are interested so the vast bulk of the 313,000 people to be hit will discover that their lives have been changed just before Christmas when they receive their letter from the Orwellian-titled “Human Services” minister Alan Tudge.

The legislation to savage pension entitlements was actually made by the Abbott government in 2015 with the backing of Nick Xenophon and the Greens who were motivated by the fact that those without savings got greater pensions as part of the trade-off. They felt as though they were modern day Robin Hoods. So let’s look at what the “Robin Hoods” actually did.

From January 1, 2017, the asset threshold that allows the full pension will be increased and so 166,000 people will get some extra money albeit not a lot.

But the penalty for exceeding the threshold will be doubled from $1.50 to $3 for every $1,000 in assets over the assets test maximum and that change savages far more people than those gaining extra pensions.

To show what happens I am going to use a couple with a house but exactly the same thing happens to single pensioners and those without a house except that the numbers are different.

At the moment, a couple can have assets outside the family home of just over $1.17 million and still draw a part pension, although at that level the pensions are minuscule so an adjustment made sense — but this is not what happened.

At the bottom end of the pension scale a couple can currently have a combined asset base of $296,500, excluding the home, and gain the full pension.

As of January 1 next year, the amount of assets they are allowed to have and still receive a full pension rises to $375,000.

But, at the other end of the spectrum, instead of being able to have some $1,178,000 worth of investments and other assets and still gain a part pension, the pension cuts out when your assets, excluding the home exceed, $816,000. That is a huge reduction.

And because the there is only a $441,000 difference between the new full pension allowable assets of $375,000 and the $816,000 asset level where there is no pension, there are bizarre consequences.

A couple with just over $816,000 dollars in assets outside the home as of January 1st 2017 will get no pension but if they reduce their assets to $375,000 they will get a full pension of some $34,382 per year.

That equates to a theoretical tax-free “return” of 7.8 per cent on the $441,000 asset reduction. That concept of a “return rate” of around 7.8 per cent can also be applied single people and those without a house — it’s just that the amounts involved are different.

There is no way that a retired couple are going to earn 7.8 per cent on that $441,000 without taking considerable risks, so the government is basically telling them that they should begin to live on their capital and, as they do, that their income will be protected because they will get a greater pension. It won’t be a smooth curve because adjustments are made over time.

And the Canberra mandarins are also effectively telling them: “Do not down size your house”. That will release cash into the asset test basket and slash your pension.

Many financial planners will be telling their clients to go off and have some cruises and let the government increase their pension.

Gifting to your children is very dangerous. Investing in your home and perhaps borrowing on it makes more sense if you don’t like cruising.

And, so, while the current government will save some money in the short term, over the long term, the pension bill will skyrocket because people are being encouraged to lower their self-reliance. In effect, the government is deliberately discouraging savings for millions of Australians — exactly the stunt they tried on superannuation.

Financial planners are also set to benefit because the rules have been made so complex that people will need advice.

Footnote: The government also wants “retirees” to work part time so there are rather generous pension income allowances for work generated income and so it might be possible for some retired couples to extend their working life to compensate for the pension loss.