Retirees can renovate, donate to beat pension pinch

A home renovation blitz and a wave of gifts to adult children can be expected in effort to beat super reforms.

A home renovation blitz among the nation’s retirees, a wave of unexpected gifts to adult children and other unusual investment behaviour can be expected in the remaining weeks of the calendar year.

Why? Because just quietly the government is putting through the second major batch of sweeping superannuation reform announced in the May budget with a sharp reduction in pension entitlements set to be introduced on January 1.

More than 300,000 Australians on full or part pensions are expected to be hit and financial planners are at a loss to suggest prudent moves to avoid the cuts which are primarily based on the value of assets outside the family home.

“We don’t think people should start offloading assets that have the potential to create income in the future, but we have to expect people will be reassessing their situation very carefully,” says Peter Hogan, head of technical at the SMSF Association.

Unlike the furore over the changes to pension contribution regulations in recent months, the government cuts to existing pensions have gone largely unnoticed. The cuts bring pension levels back to 2006 when they were improved under the Howard government.

Industry analysts suggest retirees with substantial assets who retain a part pension will come under the spotlight while those with relatively low assets should get a better deal.

The access level to the full pension has been raised to an asset valuation of $250,000 (singles) and $375,000 (couples) which is expected to bring another 100,000 people into the system.

However, in a pattern which is now typical from the Turnbull government, it is the middle band of retirees who will be hit hardest.

It is expected the majority of those who will be affected will be those homeowners with part-pensions who control assets of considerably less than $1 million.

The cut-off point for this specific group is going to be (for singles) $542,500 down from $793,750 and (for couples) $816,000 down from $1,178,500. Once a person exceeds their relevant asset limits, penalties will kick in — for every $1000 over the threshold the pension payment will be reduced by $3 (it was previously $1.50).

Financial advisers suggest that apart from renovating homes, offering financial gifts to children is a spending option which may bring retirees back inside the pension access bands — however the limit on gifts to children and grandchildren is $30,000 over five years. Critics of the changes point out that some retirees coul`d be left with a difficult choice:

1. Move up the risk spectrum to drive more income from existing assets.

2. Get total assets down by spending liberally between now and the end of the year.

However, with the changes due to be enforced from January 1, savers and investors at retirement age have little wriggle room with almost all assets counted by the ATO including non-home property, investments, business assets, household contents, cars, boats ... and yes, even caravans.

Wealth editor James Kirby hosts a live investment Q+A every Wednesday at 12.15pm at theaustralian.com.au/business