Changes to pension will hit those with assets
Changes to the age pension assets test take effect from January 1 2017. Those who are income tested will not be affected.
For a single home-owner, the base will rise from $205,500 to $250,000 and for a home-owner couple it will rise from $286,500 to $375,000. The upper cut-off points will be around $547,000 for single home-owners, and $823,000 for home-owner couples.
This will hit retirees with substantial assets hardest. An age pensioner home-owner couple with $750,000 of assessable assets should currently be receiving around $620 a fortnight pension. Under the new rules, this would drop to about $220 a fortnight - a loss of $10,400 a year.
Many people overvalue their assets. A common mistake is valuing non-investment assets at replacement value - they should be valued at second-hand value. This would put a figure of around $5,000 on most people's furniture. The new taper figures mean that every $10,000 of assessable assets has an effect of $780 a year on the pension. Overvaluing your car and furniture by $50,000 will cost you $3900 a year in pension!
In contrast, spending $100,000 on travel and house renovations (thus reducing your assets) will increase your pension by $7800 a year. That's equivalent to a capital-guaranteed return of 7.8% per annum on your money.
You can also reduce your assets by gifting part of your money away, but seek advice before you do so. The Centrelink rules allow gifts of only $10,000 in a financial year, with a maximum of $30,000 over five years. Using these rules a would-be pensioner could gift away $10,000 before 30 June and $10,000 just after it, and so reduce their assessable assets by $20,000.
Consider your situation carefully before deliberately spending or gifting large amounts of your assets. You will permanently lose access to the asset and it could take a long time to recoup the amount from extra pension. For example, the most that spending or gifting $50,000 could increase your pension under the new 7.8% taper rate is $3,900 a year. However, you will forgo interest of, say 2% or $1,000 a year, meaning that the net benefit would be $2,900 a year and it will take over 17 years to recoup the $50,000 from extra pension.
Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: email@example.com