Pension Changes Are Coming – Will You Be Ready?
Article by Rachel Lane, over 55s lifestyle and finance expert.
Did you know, from 1 January 2017, there are plans to change the age pension which could see your Centrelink payments decrease, or worse, you lose them altogether?
Over 55s lifestyle and finance expert, Rachel Lane, explains the changes that will affect the asset test calculations.
“From 1 January 2017, changes will apply to the pension asset test and are expected to affect the pension entitlement of 350,000 Australian pensioners.
“This is how the asset test works: currently a person or couple lose $1.50 per fortnight of age pension for every $1,000 of assets they have over the asset test limit.
The changes coming into effect in January will increase the threshold and increase the ‘taper rate’ so that for every $1,000 of assets over the new threshold $3.00
of age pension will be lost,” Rachel explains.
People with assets above the current threshold ($205,500 for singles and $291,500 for couples) but below the new one ($250,000 for singles and $375,000 for couples) can get more pension, while people with assets above the new threshold are likely to see their pension reduce and those whose assets exceed the new cut-off limits (singles pension cut off will be reduced from $783,500 to $547,000, and couples reduced from $1,163,000 to $823,000) will lose their pension entirely.
It is important to understand the impact this will have post 1 January. People who downsize to an over 55s community often pay less for their new home than they get for their old one – banking the proceeds.
This strategy can enable pensioners to free up capital to buy a caravan to travel around Australia or earn a bit more income to fund their lifestyle.
Let’s look at an example for a single person:
Hazel is a pensioner who is considering moving from her family home to a lifestyle-oriented community. Her home is worth $550,000 and the home she would like to buy in the community is $400,000. Hazel also has $65,000 in the bank, and $30,000 worth of personal effects including her car. While she lives at home Hazel is not eligible for rent assistance, but receives $874pfn of age pension.
If Hazel moved to one of Ingenia’s community today her pension entitlement would reduce to $815pfn (a reduction of $59pfn) but she could receive up to $130pfn of rent assistance that she never qualified for before, hence a total pension of $945pfn.
Additionally, she can earn interest on the extra $150,000 in her bank account, at 2% this money will provide her with an extra $115pfn of income. Hazel would then receive an increase of combined income at $1,060 per fortnight.
After 1 January, Hazel’s pension would increase to $835pfn and she would still be eligible for up to $130pfn of rent assistance, giving her a new combined income of $1,080 per fortnight.
As we can see the pension changes may actually mean that downsizers are better off. Understanding what the pension changes will mean for you is vital in your decision making – seek advice from a financial adviser who specialises in helping over 55s make the right choices.
Let’s now look at a couple.
Jack and Sarah have a house worth $650,000, $120,000 in the bank and $50,000 worth of personal effects including their cars. While Jack and Sarah remain at home they receive $659pfn each of pension entitlement and are not eligible for rent assistance.
They want to move to an Ingenia community and purchase a brand new home for $450,000. Using $60,000 from the proceeds of the sale of their home they buy a caravan and join their friends on the Grey Nomad trail during the cooler months.
Now that Jack and Sarah moved to the community their pension entitlement reduced to $600pfn BUT they are earning interest on the extra $140,000 in their bank account, at 2% this money will provide them with $108pfn (replacing their lost pension).
PLUS they will receive up to $123pfn of rent assistance that they never qualified for before.
After 1 January, Jack and Sarah’s pension will increase to $659pfn each and they would still be eligible for up to $123pfn of rent assistance.