Retirement savings and age pension black holes

A well written critique of this policy debacle. Thank you!

At some stage the value of a person's home will have to be factored into the assets test for people applying for the Age Pension. As pointed out in the comments above, the new asset limits for eligibility for the age pension can be overcome by buying a more expensive house.

Why should I pay tax on my savings and my own health costs when someone living in a $5 million home in Sydney can draw a pension from the Government and enjoy all the other benefits?

At the same time our elderly should not have to move from their family home in order to receive or keep their taxpayer funded pension.

Gen Y's proposal is worth considering if the inclusion of the family home in the assets test was phased in over 5 or 10 years. The Government could establish a dedicated bank that guaranteed that the equity left in a property could not fall below the amount needed for a bond in a nursing home in the same geographic area.

Such a facility would be limited to people applying for the age pension. Self-funded retirees could still access the commercial banking sector.

Good evening, great comments from all, but something that is not addressed is the issue of rising house prices. This so call profit is not liquid until you sell, so who is the winner? Beneficiaries who have not contributed to this wealth but will benefit from it. I do not know how to address this but it is a industry in itself that could contribute a lot of funds for the budget. Any ideas?

Richard, Government funded reverse mortgages are the answer here. Allow you to draw a higher age pension, with a portion of the proceeds of your house sale upon death being used to repay the liability. You could call it an old person's HECS debt.

Of course whenever it is tabled the grey army shut it down quick smart with the 'they're stealing our homes' argument.

Interesting article and comments. Are assets held within a SMSF counted for the assets test when determining government pension eligibility?

Hi David, yes, superannuation is counted for the Centrelink assets test, but check here for any qualifications. https://www.humanservices.gov.au/customer/services/centrelink/age-pension.

Dear Andrew,
What a wonderful article.
I'm one of the 326,000 middle road kill group. I've bombarded our local Federal member Ross Vasta for 12 months over this imploring him to tell Hockey (now in a plumb job in Washington, Morrison and Turnbull) that the defined benefit super bureaucrats in Canberra have just not done the modeling with this and THEY will be out of a job soon. They are just not listening!!! The real problem is it's retrospective nature as we made serious plans based on the rules at the time. It's so unfair.

Taper rate change is real pain. We need a fair dinkum government.

I agree with Robert P and that financial adviser Sandra who both say is as it is.

Spend the lot and draw draw draw!!!!! We did not intend to do this BUT that's what they want.

Hi Andrew,

Thank you for this excellent article. I am amazed that this public policy issue has not yet received a great deal more attention. The "new" asset test taper rate, as you say, is much too high. I think I saw one well thought out piece by Daryl Dixon in one of the Sunday papers, but apart from that there doesn't seem to have been much prominent coverage given to the taper rate as such, all the media attention was focussed on who was gaining what and who was losing what. The 2017 changes to the asset test are ripe to be hit by a humungous oncoming train of "unintended consequences".

Yes, the asset test taper rate was 7.8% pre-2007, but government bond yields were more than 6% then and they're less than 3% now. And even pre-2007, anecdotally I am aware that some financial planners were telling clients NOT to save, for exactly the sorts of reasons that you highlight in your article.

Under Prof Anthony Asher, I am on the Actuaries Institute's Retirement Incomes Working Group and several of us, especially Anthony, are alarmed by this issue. I have seen quite a few calculations intended to illustrate the point, all off which show a very high effective "tax" rate on savings in excess of the lower asset test threshold, but none of the calculations had the simple power of your "immediate indexed annuity purchase" illustration.

Good on you for raising some possible solutions. Another idea might be to make some part of the age pension universal - but I would see that as part of a package where the tradeoff might be a further weakening of the tax concessions in pension phase - which I would guess many of your SMSF Association members might not be too keen on! I think there's more to be done in this space. More NEEDS to be done.

I can think of only three things which might slow down the "train crash" that may well be coming.
(1) Apathy - people don't understand and don't realise the implications (especially given that only a small percentage get advice).
(2) Conservatism - people just can't come at the option of not saving hard to build up their retirement balance, or refuse to spend it down quickly in the early years of retirement to get the full age pension.
(3) Uncertainty - the fact that the new form of the asset test is SO objectionable that surely they will have to change it - in which case the fact that you've disposed of a few hundred K's in the meantime to optimise your age pension might turn out, in retrospect, not to have been the best idea.

What would be really good would be for both sides of politics to get together and design a rational superannuation system that would survive for the long term, so that members of super funds didn't have to worry about what unforeseen changes government might make next. But the day THAT happens, I promise to reconsider my long-held scepticism as to the existence of the tooth fairy. And I might start to wonder whether at least ONE of the Christmas presents I have received from "Santa Claus" over the years might NOT have turned up on a family credit card statement in January!

Again thanks for your article Andrew. Because the change to the taper rate has only just been made, I can't see Treasury (or the Treasurer) being in a rush to change it, but equally I can't see the new taper rate lasting very long. It looks like you will be one of those who will be leading the conversation that will convince the politicians, the bureaucrats and the public as to what we should do instead!

The one thing that many commentators forget is that people in retirement base their investment decisions on the rules prevailing at that time. When governments decide to change the rules to the detriment of those retirees they should expect to get their backsides kicked. That is the reason why Turnbull and Morrison will lose their jobs at the next election! The polls show that but they seem to be oblivious to that truism!

Dear Robert. I wholeheartedly agree. I am one of the many who based their retirement decisions on the rules prevailing at that time. In 2002 my spouse and I supported calls by Treasurer Peter Costello to have one child for Mum, one for Dad and one for the Country, and began our family.

In 2006 the Commonwealth Government established the Future Fund to make provision for its unfunded superannuation liabilities. Today this fund is worth over $129 billion.

From 10 May 2006 to 30 June 2007 the Government allowed up to $1 million of non-concessional contributions to be put into a SMSF fund. The 2007 Budget also allowed for all pension payments from a taxed source to be tax free when paid to individuals aged 60 or over. These policies encouraged me to salary sacrifice and put all my savings into super, despite incurring a capital gains tax liability of several hundred thousand dollars. My expectation was that the earnings would support my family and my children’s secondary and tertiary education when I retired or died.

Based on assurances given by the then Liberal Government that there would be no changes to the superannuation system, in 2014, at the age of 63, I retired.

Now, aged 66, I am about to take on part-time work to cover my newly acquired tax bill resulting from changes to the superannuation system. In particular the newly created superannuation pension cap that also includes a notional value for my taxed, defined benefit pension, funded by the Future Fund. Because this notional value cannot be taken as cash, should I need money to pay for educational or medical expenses (unlike Age Pension recipients we are not entitled to health benefits) in the future I may be forced to withdraw a lump sum from the already reduced tax free portion of my SMSF.

The current Treasurer appears more interested in boosting Australia’s population through immigration than ensuring that children conceived under the policy of his predecessor have the educational opportunities expected when they were born.

I hope and pray that I live another 12 years until my children complete their tertiary education, otherwise the money I have been forced to move into an accumulation account will be taxed at an even higher rate. As for the capital sum, the purchasing power of whatever is left after educating my children will be half in 10 years’ time. I can understand why people currently planning for a dignified retirement prefer to negatively gear properties rather than salary sacrificing into superannuation.

Without trying to offend, I find this a frustrating article and it does not provide the foundation for a healthy debate. Important oversights in the examples provided in this article include:

1. Assuming no capital drawdown on the income comparison (the idea of super is that you do draw down on capital as well - the primary objective of super is not to be a tax-preferred bequest savings scheme)

2. When considering the annuity – the Age Pension entitlement is a year 1 calculation. The entitlement grows significantly in future years.

It is important to compare apples with apples. However in this article there are also oranges and pears…

Once numbers are clarified we can then have a sensible debate about the tax benefits provided through super versus the benefits paid out via Age Pension.

Dave,
You are correct in noting that the payments from the indexed annuity increase over time. However a relevant point that is missed in the article is that the $7,800 comparison is nominal even though Age Pension is indexed. It is also worth noting that age does not affect the taper rate so the result varies at different ages.
The relevant rates (as at 3 April 2017) for a nominal annuity (without a death benefit to be comparable) are: for a 65-year-old woman $6,392 and for a 75-year-old woman $8,315. Male payments are higher.
So, while the youngest retirees might not automatically match the rate in the means test, those in their early 70s can easily exceed the payments with a secure income stream. Combining the annuity with other retirement income sources can usually produce a better result.
Aaron Minney Head of Retirement Income Research, Challenger

Good article Andrew. The incentive to save is being eroded by endless government meddling.

Maybe time to think more radically. The U.K. system provides all retirees with a flat pension related to the number of tax paying years they have under their belts. Savings are therefore an added bonus not another pot to tax.

In our globalized world i would like to see something similar to the UK sysrem here. With close to half of the residents of Sydney and Melbourne being new or first generation migrants, more often now being middle class, educated and skilled when they arrive, there is the likely reality that many applying for the pension in the future may have significant, undiscovered assets held overseas. The assets test for qualfying for the pension is a very unreliable test in a world of dual citizens.

We had that system in the early 1970's. Therefore Lang Hancock, Kerry Packer, Rupert Murdoch, Richard Pratt Victor Smorgan David Hains , Alan Bond, Frank Lowy,and the Liebermans would be receiving the age pension when they turn 70 or 75? Luckily Malcolm Fraser introduced the income test,for the previously exempt over 70's and Bob Hawke introduced the assets test and deeming.

These and other Australians should not be receiving any amount of aged pension. The aged pension should be for people with modest means, not for the middle classes and the wealthy.

Following on from Sandra's point, consider a 65 year old couple with $800,000 in super/investments living in an $700,000 home. They currently get hardly any age pension. If they sell their existing home and buy a more expensive one costing $1.15m, they instantly receive the full age pension and top up any additional income needs by drawing down on the remaining $350,000.

No wonder we have a housing affordability problem with crackpot policies like this. And don't get me started on investment property tax benefits.

Good article, Andrew. Unfortunately a lot of the anxiety created by the recent lowering of the Centrelink asset cut-off thresholds comes from the expectations raised by the surprising and 'unnecessary' changes John Howard made years ago to dramatically increase the cut-off threshold amounts!

As a Cuffelinks reader I certainly do care about Govt. pension thresholds. I am one who was bumped off a small part-pension on 1st Jan this year as my total assessable assets were approx $600k and I own my own modest Unit in a regional area. I am single and 69 years (divorced). Very hard now to earn enough from a small Super acct and a share portfolio to live on. So yes, I may consider a world trip to bring me again under the Govt. pension threshold.

I have told clients for years not to rely on a Government for retirement income. Rely on yourself.
Australia is clearly ageing and we can't stop it. The Age pension must be reduced from here.

Hi Steve, not a 'simple minded' point at all. We previously published an article explaining why it was important to consider the capital as well as the income:

http://cuffelinks.com.au/changes-asset-test-leads-questionable-advice/

But we like a debate so happy to publish another view.

Hi Graham - thanks for the link to the previous article. The article in favour of draw-down over 8 years has two problems - (1) it assumes a risk-free net return after costs and tax of inflation +4%pa; and (2) the retiree suffers a dramatic decline in income/lifestyle at the end of year 8. The current cash rate is 1.5%pa, 10 year bond rate 2.7%pa and the average return of a 'balanced' super fund for 10 years ending 31 December 2016 has been 5.13%pa (SuperRatings SR50 Balanced Index)....... clearly drawing-down on a portfolio of risk assets with ongoing advice will suit some and nobody's talking about 'blowing' ALL of their capital - only some of their capital. It's simply a fact that for the first time in 30 years, you can be worse off with more money, if you're "in the middle".

Why don`t commentators on super balances ever raise the use of the capital sum. I am in the 65 + age bracket thinking that the idea is to run out the last of your funds when you pay for your funeral. Do all people believe these sums should be left to those who inherit so they can run off and purchase there Audi`s in remembrance.
Shouldn`t there be more emphasis on tables combining the drawing down of capital with income derived therefrom so people can decide what income to draw ?????
Just a thought from a simple minded!!!!

Steve, you have hit the nail on the head. $800k in financial assets, and yet crying poor that pension has been cut. Use some of that money to fund the difference, and guess what as you draw down over time your pension will increase. This is why our retirement system has failed us, it either should be mandated or significantly encouraged to place your retirement savings in a fixed term (ie life expectancy) pension. These assets are there to fund your retirement, not to live off the interest/dividends/rent so you can give the capital to your kids when you die.

There is one problem with this, however.

A couple who lived very frugally and managed to save $850k get no pension at all. If they decide to put their $850k into an indexed lifetime annuity they will get around $28,000 per year in income at current advertised annuity rates They are still considered to own the $850k, at least initially, so they still get no pension.

But wait a minute, if they had spent all their money over their working years and saved nothing at all, they would be on a full pension and get $34,000 a year.

Their asset base for Centrelink would reduce very slowly and eventually they would receive a small amount of pension, but by that time they would probably have starved to death on their $28k per year.

Sandra is right. Couples with savings in the range where they are affected by the assets test will have a better financial outcome by spending their money on housing improvements or holidays or by simply hiding it under the mattress.

Is this an outcome we really want for our retirees ?

Agreed. I wouldn't mind earning $20,000 pa in interest. the capital is still there as a safety net. When you've drawn down most of the capital & income from interest is low you will qualify for the pension. What's the problem? I thought that people were saving for retirement so they didn't have to rely on the pension as pensioners were paupers, but no they want it too. Greed, greed, poor things might have to stop all those dinner parties & overseas trips.

you can see this also driving pensioners to take more risk in their portfolios, so as to try target higher returns.
Not sure how many of these people will just want to spend the money, given they want they want the security blanket of funds for rainy day/ health issues/ bigger costs that they just cant fund with even the full pension.

The single homeowner cut from 793K to 542K is in my opinion a really savage cut - chiefly widowed women who often struggle to understand the system, are often elderly and vulnerable anyway, and now have their Age Pension taken from them, I just don't think they realised the emotional impact.

I have also been astounded that the outcry has been all about the $1.6 ($3.2 as a couple) million limit, which is arguably fair enough for the government 'no tax' concession to be allowed for. Hard to argue that the rest of the community can support this tax free status above that level. Shows that the rich have more influence i suppose. I can see no argument why government should give tax break to income over $100k per person...esp as you can invest heaps outside super and get tax free income as well

However, the real pain is the taper and even worse (perhaps out of self interest) is the new $25k concessional limit that stops most people who are now over 50 ever getting near the $1.6 level in the meantime...of course this is the one that 'saves' the tax that the government needs so that was always the one that would go ahead. These two policies are going to achieve exactly the opposite of what the government says it wants, and will result in bigger pension bills in the future as people waste their savings or stop saving (give up)

Of course, the $1.6m is also contributing to the real-estate boom as people invest money outside super... and before new capital gains tax rules inevitably come in.

The whole thing will never be fixed until a fair dinkum and competent government arrives with a consistent policy framework...and includes the family home in assessments of assets (even if its any value over $1m!) so less well off people are not indirectly subsidising much more wealthy people

Do Cuffelinks' readers really care about the government pension?

Even if they are not personally drawing a pension (although I expect many are), we have thousands of financial advisers as readers and they advise people who are on pensions. Some of their clients will be asking if it's worth saving anymore.

Our clients are pre and self-funded retirees. As a financial planner I care about our 3 pillar retirement income system and the second pillar, personal savings, is cracking. The new assets test tapering rate only affects middle Australia - it doesn't affect lower wealth households (they're already on the Full Age Pension) or higher wealth households with retirement capital >$1M over and above residence (they're not bothered with the Age Pension). The new assets test rules tell middle Australia (either already retired or coming up to retirement) "Don't bother saving. If you have saved, you'd better get rid of it - for every $100,000 you get rid of you'll get $7,800 per annum income from the government" ..... that's my advice by the way.
Rather than saving the government money by reducing part age pensions, this ill-conceived and misinformed policy (who thinks this stuff up!) will simply replace part age pensions with full age pensions; plus encourage people to tie up more non-productive capital in their home (which clearly doesn't assist with retirement income & therefore spending/economic growth; or housing affordability). RIP middle Australia.

Sandra, that is irresponsible advice. How about educating your clients that their super and other assets should be used to fund their retirement (income and capital), and setting up appropriate drawdown strategies to ensure their assets AND age pension funds their lifestyle appropriately over their lifetime. Telling people to blow their savings to get more age pension would be not be advice I'd expect from qualified financial adviser.

Dear Gen Y - no, its the advice you'd expect from someone who was sitting with clients for a decade before you were conceived. Let's drop the insults from behind the alias and stick to the debate.

Dear Sandra, The same advice will probably apply to individuals affected by the new pension caps in 10 years time. Because the Age Pension is indexed and SMSF pension accounts are capped, in about 15 years the Age Pension for a couple will be about the same value as that received by a self-funded retiree who commences his/her superannuation pension in July 2017.

Despite the Treasurer's insistence that caps on pension payments will save the government money, the changes will result in a large number of self-funded retirees drawing down their pension balances so they become eligible for a Government-funded pension. This will be particularly the case where the superannuation funds are predominantly held by one member of the couple.

Recipients of Defined Benefit Pensions will be stuck in the middle. Unable to cash out the notional value and with an indexation adjustment less than the Old Age Pension, the purchasing power of their pensions will decline over time.