10 little-known pension traps prove the value of advice

Hi I thought we were under an obligation to notify centrelink of any change re your assets regardless whether it's up or down if it changes by $2,000 ? You advise if it does go up you don't need to advise them as they will pick it up when they do their automatic adjustments in march/September. Point in question is couple have $500,000 in assets and are getting a part pension in march. In april they win $1m in lotto but still get a pension??? Doesn't seem correct to me.

In the good old days, a retired couple who had accrued a $1m either from investments or downsizing, stuck it in a term deposit and happy days. A modest but sufficient gross income split two ways - pay the bills, have a modest hollie every once in while, keep the Kingswood purring and sleep easy at night. Now that $1m struggles to earn 0.5% or $5000 pa - trouble big trouble. Oh and the good ole days : 1985 > 2011 TD rates 13.85% > 5.00%. The GFC, central bank QE and IR policy decisions and retail banks searching for interest rate spread to maintain profits have stripped the earning capacity of capital. All this has loaded the govt pension system. What happens next ???

"What happens next ???":

Disease sweeps across China cutting interdependent supply lines. Inflation entrenches negative real interest rates for years. Gold beckons. Then along comes Paul Volker III and 10% real interest rates.

This should really annoy Gen X and subsequent generations: I never planned to live on the aged pension, but I made sure I would get almost the equivalent by working for the Federal Government for just 5 years from my late 20s before heading to the corporate world. For only 5 years of service as a low-ranking public servant, Comsuper pays me an indexed and 66% reversionary $20k p.a. plus a 10% tax offset. No need to report income or assets to Centrelink. I invoked this pension at 55, and kept working in the private sector. The best part is I got all my contributions and earnings back, tax free. Comsuper are wonderful people, aren't they?

Good for you! However, stories such as this highlight the egregious hypocrisy of Government policy and fairness in all matters superannuation.That public servants still often get 15.4% superannuation input (paid by the tax payer) whilst the Hoi polloi only 10% rising to 12% eventually, speaks volumes.

So the objective of the advice seems to be to enable the middle class to keep receiving welfare. It's about time tax was slashed and people encouraged to stand on their own feet. The government gives nothing without first taking it from someone else.

Once, when the country made and sold actual goods and services and was truly productive, everyone got the age pension. In addition, we had full employment. Jobs were also real and productive, unlike what I see today. If you keep attacking the 'middle' class, you will soon find there is none left. That is the road to poverty for the country.

You're kidding. When we "made things" they were expensive, protected behind tariff barriers, the opposite of "productive". Consumers had to put up with crap cars, for instance, because decent ones were priced out, diverting lots of income away from other spending and holding us back big time.
We are a much more economically productive nation now than back in the day.
Besides, the ageing of the population would have posed the same problem for the old economy as it does for us. That's the challenge.

The capital gain after discount would be
$125000 not $225000 as they Contributed $200000 at the start.

Many years ago when the Pension was introduced the govt of the day set aside a percentage of tax to pay for it. Over the years other governments transferred that to `general revenue' so they could spend it - typical.

Same with Govt super scheme. The govt was the only employer not required to make super contributions up front. Now they are squealing about the amount they owe to the scheme and now `we' have to fund it from current revenue.
If we simplified the rules - so what if a couple of millionaires get a pension! They have probably contributed more than blue collar joe over the years anyway and the savings on over zealous public servants who scrutinize every dollar would probably go a long way to funding it.

There is a very easy solution to all these pension (& many other) problems...... On behalf of all Australians the govt receives royalties on all our resources exports..... These royalties are far more than needed to pay ALL adult Australians a dividend of say $20k/year...no matter what their personal income is.....(This $20K would replace all pensions & benefits already paid by the govt). (Kids would get $1k/year for each year old up to 20 years old).... (and income tax would start at the 1st $ wage earnings) 

Sorry to see that my above comment was edited/shortened for posting ....
There was a lot more to my comment.....
it is not as simple as indicated above as eg all award wages would need to reduce accordingly for appropriate economic benefit.
Regards Rudolf

The system should not be rorted on behalf of wealthy people to receive the pension. It’s means tested for a reason, and articles like this are not welcome.

"means tested for a reason": What reason? No means test in NZ.

>What reason? No means test in NZ.

exactly! We could learn a lot from NZ. At the very least give "the prized Pensioner Concession Card" to all people of pensioner age.

we do have a very distorted welfare system full of inconsistencies, perverse incentives, interactions and red tape.

Dudley other countries have social security taxes to fund pensions,I think NZ is one of those but I am not sure.
Working in a few countries ( but not NZ) I tried to educate myself about them.Obviously the English speaking countries were easier.
So the UK has NICS ( national insurance contributions).In rough numbers this is 25% of wages,13.5% or so contributed by the employer,and 12.5% by the employee.This funds pensions,national health and other social security .35 years of contributions are needed to get a full pension,around £180 per week.The USA seems to follow much the same system,but they have 401K plans,503 plans and many other savings systems to increase pensions,IRA,Roth IRA,all with different tax treatments.The UK has ISA,SIPPS and other things,but started later.The social security pensions are not means tested so the queen would get the age pension in the UK .Governments everywhere seem to take pride in making retirement as complicated as possible.However they are all moving to put the onus on the individual rather than the state.The lack of young people to pay these social security taxes seems a reasonable assumption to me.The US projected a shortfall would occur in 2017,more would be paid out in pensions than would be collected through the social security system,I don't know if this occured.
Turning to the UK with around 12 million pensioners @£180 a week these are huge numbers to be funded by workers paying their weekly NICS.When there were 7 or 8 workers to pay pensions and health care costs that would seem to be OK.When there are 3 or 4 and people are living much longer it is not sustainable.The health care costs alone must be huge

Australia may or may not be leading the pack in pensions,but I think other countries will start to means test or reduce the annual rises in pensions so the onus falls more on the individual.
For me the Australian system matures in 2050 when workers have had 50 years of super at 9% contributions and up.Perhaps by 2050 it may be a case of spend your super first and then come to us.I do think workers will be better off than having a state pension only,and perhaps the people that fall through the cracks may be better looked after( hopefully).
Just my thoughts,people will have to learn how to invest for themselves,or be dependant on super.
The really strange thing is that everybody seems to be dependant on stock markets now.Have we created a monster?

"other countries have social security taxes to fund pensions": where the principal difference is that government invests and controls the money whereas in Aus individuals do - until 'condition of release' in both systems. UK makes 'no' / little provision for those who made no NI contributions and are not a wife of a husband who has. UK does not have the equivalent of the Age Pension - is has the equivalent of (government managed) Superannuation - as do many countries.

No Dudley ,the simple solution is usually the answer. The system is pay as you go ,they take the money in,and they pay it out.Some years it is in deficit,some it is in surplus.

Audited accounts 9/12/21
Contributions £111.6 B
Inv income ( in surplus this year) £41.5 M ( very small)
Other odds and ends take total contributions to £114.3B

Paid out £106.6B other odds and ends take paid out to £108.7 B.
The UK govt will meet their pension obligations.Some years deficit,some years surplus.Deficit years will become common,they have been telling you that since the 1980s,no young people to pay for the old people.
PAYG systems are very simple,same as wages.Some weeks you are in surplus after paying bills.Some weeks deficit.People seem to always want to make things complicated.
It seems employee is 12% of wages,employer is 13.8% of wages They have bands,same as tax bands.

"The [UK] system is pay as you go": but contributor can not withdraw until 'State Pension Age'.

'The money is held in the National Insurance Fund (NIF), separate from the Consolidated Fund. Contributions are not "taxes" because they are not directly available for general expenditure by the government.'
https://en.wikipedia.org/wiki/National_Insurance_Fund

"Some years deficit, some years surplus.": UK government run NI system is similar to an Aus super fund from the perspective of the contributor.

The clear difference is the absence of a non-contributory Age Pension in UK available from 'State Pension Age' (~half pension > 80 y?).

Tony - do you mean “wealthy people” to include those who worked hard, did not smoke, sacrificed holidays, made their own coffees etc? They took responsibility or their own lives and should not be “punished” for it. Lester

> it would be nice to see a shift in mindset from the pension being an entitlement to acknowledging that it means you haven't saved enough for your own retirement

yes that would be nice.

experience shows that only a very small minority cater for themselves in retirement - the vast majority of retirees get the pension. The only answer I can see is forced savings probably through increasing the superannuation levy to between 18 and 20%. The great majority will simply spend whatever they receive so better that they don't receive it in the first place.

and all the welfare rules are complex with many interactions.

wouldn't it be wonderful to simplify it? No assets tests, no income tests. No penalties for being responsible and saving. No perverse incentives to spend your money on a cruise or getting a new kitchen and bathroom. Everyone simply gets the same amount.

there are so many "claw backs" in our system that create ridiculous outcomes and incentives. Look at a fairly recent one - the LMITO which effectively adds 3% to the marginal rate of tax between 90 and 126k. Many claw backs at the lower end create poverty traps with very high effective tax rates - I say "get rid of them all".

So a universal pension in the short term and a UBI in the longer term with a flatter taxation structure. We could get rid of ALL pensions, unemployment benefits and other government welfare. And get rid of all poverty traps at the same time. A simpler system without all the overhead of a bloated government system implementing all the current red tape.

Yes I know: "tell him he's dreaming".

Yes excellent insight Geoff, labelling people like us 'socialists'; how do we ever expect the poor taxpayers to pay for it all!?! When it is pointed out that the tax concessions on Super Pensions together with the compliance/administration expenses exceed the Aged Pensions Paid, and is a form of socialism for the wealthy, that is not usually appreciated. Scrap or reduce some of the overly generous concessions and that would easily pay for a UBI/universal pension. The $1.7M pension limit is at least a first small step in this direction. So wealthy couples can still commence a pension with $3.4M (and this can grow) and never pay any tax on the earnings. So in an average year when their balanced/growth portfolio earns ~10% they pay NO tax on the $340k in earnings. A very generous gift for sure; specially in comparison to those who might actually have to work for a living and would pay over six figures in tax on such income. Labor's attack on franking credit refunds for this cohort was barking up the wrong tree, in my opinion. There would be no franking refunds if they actually had to pay some income tax.

Thanks, interesting article. I doubt I would ever qualify (and hope I don't ever find myself needing pension), but I suggest republishing this article (or an update) every year. I think it would be useful for many of us. (Especially those of us too cheap to seek out financial advice! Ha ha.)

1).I see alot of comments about retirees having $800 in assets , and how tjey don't deserve to recieve the pension.
Well little do those people realise, the retirees had already paid an extra 9%tax to pay for that pension, while working for 40 years. Its not an extra tax to the younger generation.
2). Could you do an article on reversed mortgages please.
The huge pit- fall, In sure would be that if we have a reverse mortgage and live to 90 plus years , like my mother. Where will we find the money to put ourselves into aged care? Our house will go to the Bank for paying of the reverse mortgage and the tax payer will be funding our aged care home living .
Believe me that will cost so much more than $800 in assets and a house. We will have to all go into Government aged care homes in which there are not enough of them. Better start building them.
If this system , reverse mortgage, comes in , In a big way due to preasure from the younger generation , whom have no idea of the cost of private age are homes.They will be in for a nasty shock as the tax bill for us oldies will be huge, instead of self funded.

Aussie Hifire sounds young, who lives on Sydney Nth. Shore, (or equivalent) attended a private school, and university, never lived in a suburb with high unemployment, never been retrenched at 50+, never struggled to pay off a home over say 30 years and probably never had to choose between buying shoes or having food. Wait till you are 67 or 70 and see if your opinions on who should receive the Single Aged Pension of $967.37 pfn have changed. $967.37 × 26 does not equal $37,000 per year.

> $967.37 × 26 does not equal $37,000 per year.

yes I think the single rate is currently around $25,155 pa whereas the rate for a COUPLE is around $37,924 per year.

I have seen estimates that for a couple, by the time you add in all the health and energy benefits the pension is worth close to a million dollars. Another time I read it was "only" worth $600k. I guess it depends what assumptions and rates of return you are basing your calculations on.

But it is a large hand-out by any measure.

Actually I'm in my mid 40s, live in a large regional city, went to state schools and then a second/third tier university in a regional city, have spent plenty of time in poorer suburbs, and have been made redundant a couple of times.

Also if you look at what I said it was not that people should not receive any age pension, it was that the assets test should be reduced significantly. For the record my household spending last year for a family of 4 was about $37k so roughly the same as the age pension for a couple (no mortgage). Top that up with some extra income from your own investments and it is entirely possible to have a comfortable life.

Some great examples of common pension traps here, but I think the biggest one is expecting that the rules around eligibility won't change. Given the massive debts the country has run up over the past couple of years and even prior to that, it is quite astonishing to me that we continue to give thousands or even tens of thousands of dollars each and every year to couples who own their own home and have high single digit hundreds of thousands of dollars in assets on top of that.

Yes it will be politically unpopular when one party or another finally reins in this ridiculous spending by reducing the asset test thresholds, and similarly when the family home is incorporated into the assessment one way or another, but eventually it must be done and the sooner the better for the sake of future generations who are going to be stuck paying off all this debt.

"reducing the asset test thresholds": Then the retiree's objective would be to arrive at Age Pension age with less assessable assets.

Abolishing the means test would abolish the incentive to impecuniosity.

Or retiree's to be might accept that the taxpayer shouldn't be on the hook for funding the lifestyle of millionaires (which many pensioners are if you include the home and their savings particularly in Sydney and Melbourne), and that the age pension is a form of welfare so that instead of trying to get as much of it as possible they should be trying to support themselves.

I don't kid myself that everyone will do this, but it would be nice to see a shift in mindset from the pension being an entitlement to acknowledging that it means you haven't saved enough for your own retirement, and the further the assets test is cut the more likely we are to see this change.

"reducing the asset test thresholds" ... "funding the lifestyle of millionaires" ... "trying to support themselves": That would increase the asset taper rate from an increase of $0.0774 / y in Age Pension payment for each $1.00 decrease in assessable assets. Currently it is 'impossible' to find a risk free investment that pays 7.74% / y. = (26 * 1458.60) / (891500 - 405000) = 7.74% Hence the allure of the risk free, capital free Age Pension.

Dudley, what does impecuniosity mean?

I see no reason why we should be giving several thousand dollars a year to a retired couple who have $800k in investments plus the family home. I would be quite happy reducing the assets test threshold quite sharply, to pluck some numbers out of the air let's say for couples who own their own home $200k as the lower threshold and $400k as the higher limit. With a 20 year life expectancy from age pension age that means that the couple would receive about $37k a year from the age pension plus roughly $10k a year from their own savings even if they just kept up with inflation, so $47k a year which should be quite comfortable for two people with no mortgage and no kids at home. If they want more than that in retirement then they can save for it while they are working.

Also I don't believe the deeming rate is supposed to reflect a risk free rate, investors are or at least should be expected to take on at least some risk with their investments.

= (26 * 1458.6) / (400000 - 200000) = 18.96%. Unbeatable risk free rate of return. Stuff all but $200,000 in home, capital gains ~6% / y tax free. All with < ~$800,000 beat the doors down.

The current push is for pensioners to sell their home and downsize. This is also a trap because Centrelink sees any left over profit from the sale, if it is kept in a savings account, as "deemed income", whether it earns interest or not.

A millionaire today, often due to outsize property price growth, ain’t what it used to be! Affordable property in nice locations is getting very hard to find, even if you downsize!

Hifire. People who ow their own home have been paying off their mortgage for years. Not relying on government rental assistance or public housing. So start saving and buy something instead of pulling people down. But I do agree people with 800k of assets it's ridiculous to give them a pension however leave the family home alone. Thanks.

A couple who own their own home with $800,000 in assets jointly receive a fortnightly pension of just $273.60 , or an annual benefit of of $7113.60. In fact, the more assets this couple have over the threshold of $405,000, the less pension they receive. Once their assets exceed $891,500 they receive no pension at all. The pension is withdrawn at the rate of $3 per fortnight for every $1000 of assets over the threshold - the so-called taper rate.
An extra $100,000 in assets reduces the annual pension by $7,800. Put another way, reducing your assets by $100,000 by upsizing your family home for example (which is a non-assessable asset), will increase your pension by $7,800 per year (7.8%) which is more than that $100,000 can earn.
As Dudley often notes, you maximise your income by having no more than $405,000 in assessable assets to maximise the pension plus the income those assets can earn. Any more assets than that with reduce your income because they are unlikely to earn better than (7.8%) as the pension is withdrawn.
I’d call that perverse incentives.

Aussie HIFIRE…demonstrates an unfortunate but understandable ( for his/her/other) age an attitude where all they see is wingeing pensioners looking to gain more from the system. However HIFIRE seems to ignore benefits like the huge and growing child care benefits, first home grants and concessional loans (for some ), education incentives and loans, COVID relief programmes..all things available to most except pensioners. Also in our day, no childcare (just imagine that today). No soft education loans/ incentives. No natural disaster relief. Sometimes it is only living through life’s cycles which gives one the wisdom to offer an informed opinion. History and human nature would also indicate that when HIFIRE reaches pension age, he/ she will be fending off ill informed comments from a new HIFIRE…..life’s cycle goes on.

Why are the rules so complex and potentially unfair to those who do not get advice? and
Why do we feel that millionaires should be receiving welfare?
Are we incapable of changing?

"Why are the rules so complex": To prevent unworthy millionaires collecting welfare. "Why do we feel that millionaires should be receiving welfare?": Because they paid for it all.

Many hard working people paid tax in their lifetime, it's unfair not giving them age pension.
"Age pension" is such a deceiving name, I have no issue not receiving it IF its name changed to "hardship pension".

Very informative article!
It's very annoying that when you are gifting to children, you have to consider that you are not losing 50% of it to the in-law should there be a relationship break-up.
Is there any solutions to ease that worry?

If I'm gifting to my child, I would suggest making it a personal loan to that child. This would be in writing, with a repayment of the full amount payment as and when I require. If their marriage doesn't work out, my loan is not part of the assets split 50/50. My child retains the gifted amount, the in-law does not get access to any portion of that gift.

Thanks Ricky, but a loan is still treated as your asset, it won't help you qualify for age pension...

Lily any decent planner will have a strategy to solve your problems regarding your questions, however, a decent Planner will charge you for that advice but weighed up against the potential loss of capital good advice will be
very cheap in the scheme of things.

If it's a 'gift' for a property purchase, a caveat over the title for a 'payable on demand loan' may be the way to go. But the 'loan' will likely count as gifting for as long as the caveat is in effect and five years after, not only for OAP purposes if that's in the picture, but also towards assets taken into account for the means tested daily payment (in addition to the other daily payments) if one or both parents go into residential aged care. The caveat will likely also restrict the child's borrowing capacity (which may be a good thing!).

I read somewhere that such an "on demand loan" could be treated by Family Law Court as a gift thus splittable.

Superannuation / best place to hide money from centerlink

Just when you think you know all the rules, Noel hits the ball over the fence. Oh yes, my mind must be on the Ashes starting today.