With all the talk of the government bringing out rules to tax superannuation or limit balances, I have been having some very interesting conversations with colleagues and clients, especially those whose retirement savings are expected to be in the $600,000 $900,000 level.
Many are conservative investors and would hold 30-40% of these funds in Cash and Term Deposits normally, which at current levels would earn them 2.0-3.1% at best.
They are concerned that they may not qualify for the Age Pension when the Asset Test limits apply in 2017 or lose a substantial portion of what they currently receive. Further they don’t trust that the rules for the Commonwealth Seniors Health Care card won’t tighten further so that offers no solace. Now with the added worry that the government may tax or tighten superannuation pension rules and affect them, they are looking for some alternatives that offer more security.
So I did the figures on one option I had discussed with my colleague Richard Livingston at Eviser.com.au (our online General Advice service). I looked at a couple who are currently retired and have $850,000 in assets that for example purposes are all deemed and of which $400,000 is in Term Deposits.
They currently receive $6,104 each of Age Pension per year which has helped them as the rates on their Term Deposits have dropped significantly in the preceding 5 years. The problem is that with the new asset test in 2017 they will lose that Age Pension completely or $12,208 as a couple per year.
The table below summarises these changes and the likely impacts for a home owning couple:
Table 1: Age Pension Asset test changes and impact on our clients
Asset test threshold | Couples -Home Owners | Impact on combined pensioners increase (decrease) |
Announced lower threshold
(current threshold) |
$375,000
($286,500) |
$49 pf or $1275 p.a. extra |
Announced Cut-off threshold
(current cut-off threshold) |
$823,000
($1,151,500) |
($510) pf or ($13,260) pa |
- Calculations are based on pension rates as at 20 September 2015.
Strategy to both secure some Age Pension and provide a better return that Term Deposits.
Note: this is not a recommendation to implement this strategy and you should seek personal advice before doing anything like this with your savings.
So what if instead of keeping $400,000 of their funds in Term Deposits as they currently do, they put that $200,000 in to a value adding extension to their current home (say a kitchen or extra bathroom and bedroom extension). To be clear, THEY DO NOT NEED THE EXTRA ROOM!.
Well even at the best current Term Deposit Rates, say 3%, they would lose $6,000 per year in investment income. However as their assets for Centrelink Age Pension purposes have now dropped from $850,000 to $650,000 their Age Pension would increase to $10,004 each per year until January 2017 and they would receive $6,747 each or $13,554 as a couple from 2017 onward based on current rates.
Can you see the perverse nature of using this strategy. They reduce their assessable assets by $200,000 and probably add significant value to their home if a smart extension is done while at the same time getting over $13,554 from the Age Pension as opposed to only foregoing $6,000 of investment income.
So instead of the 3% return on that Term Deposit they are getting a 6.78% per year return plus potential for increased value in their property going forward.
Is this really what we want to see? Clients refusing to downsize or actually pumping more of their savings in to their family home which is exactly what the country does not need in terms of housing affordability issues.
Are you looking for an advisor that will keep you up to date and provide guidance and tips like in this blog? Then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
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