The big news this month was the 2015 Federal Budget.
Small business will be happy with the news of immediate write-offs for equipment purchases up to $20,000. However that is about as far as the good news went. While the much feared changes to superannuation tax rates didn’t happen (that is a debate that will continue though) the budget was bad news for retirees with assets of more than $450,000.
While it has been phrased in many different ways, the simple explanation is that there will be a change in what is called the ‘taper rate’.
This is the rate at which your age pension entitlement reduces, once you have assets above a certain threshold. The threshold depends on whether you are single or partnered, and whether you are a homeowner or non-homeowner.
In the past, the pension entitlement phased out at $1.50 per fortnight, per $1,000 that you had above the threshold. For a homeowner couple, once their assets exceeded $286,500 the rate of pension started to reduce at $1.50 per $1,000. The effect was that at a level of $1,151,000 their pension would be eliminated altogether.
The new taper rate of $3.00 per $1,000 in assets, to apply from 1 January 2017, means that the pension will cut out for a homeowner couple once their assets reach $823,000
In our graph below we present the impact based on asset holdings for a homeowner couple.
As you can see, there are some who are going to be better off.
This is the result of lifting the taper threshold from $286,500 to $375,000
Homeowner couples with assets of up to $450,000 will actually get more than they currently receive but others will be worse off. This is outlined in our next chart.
If your assessable assets are $278,500 there is no real change. But if you have $375,000 in assets, then you are the peak beneficiary, with an increase of $3,451 in pension entitlement. By the time you hit the $460,000 mark, you fall into the camp who will be worse off.
However, the biggest hit is to those with around $800,000 in assessable assets.
They will bear the brunt of the biggest reduction in pension dollars, and the figures on our chart don’t include other fringe benefits!
Pensioners who lose age pension entitlements have been promised that they will automatically receive the Commonwealth Seniors Health card, but that is scant compensation for the loss of pension.
Given that at $375,000 in assets you can get the full couples rate of age pension ($32,417 per annum), but if you save an extra $448,000 in assets over your lifetime, you get nothing, it would seem to be a huge disincentive to save! One which the government may not have fully thought out.
Whether we see any change to this before the implementation date of 1 January 2017 remains to be seen. Are there any financial planning strategies that can assist here? Yes. A strategy of combining a Lifetime Annuity (where the asset value is marked down every six months) with an account based pension more heavily weighted to equities may well come out as a winner.
Consult your financial planner or get in touch with me for more information.