Sunday, November 6, 2016

Rebalancing the Assets Test

By now most pensioners will have received a letter from Centrelink outlining the changes to the age pension test from 1 January 2017.

We have received a significant number of queries regarding this letter. Hence, we will attempt to summarise the most common concerns.

For expediency we will use one central reference ‘document’ that in turn refers to key Government data. This reference is one of a series of fact checks published by The Conversation. We will refer to this document as The Conversation.

Proportion of pensioners affected – 90% unaffected sounds better than 300,000 Australians to lose.

The Centrelink letter states that “Ninety per cent of pensioners will either not be affected by this change or will receive an increase in their pension”.

The Conversation estimates that 2.4 million Australians “were receiving Age Pensions or Veterans Affairs Pensions”. Therefore, Centrelink are saying that approximately 240,000 Australians will have their pensions rejected or reduced. states “the harsher Age Pension assets test for part Age Pension means an estimated 300,000 Australians will lose Age Pension entitlements, with 100,000 of those retirees losing all entitlements. Now that we know the part Age Pension thresholds are lower than first announced, we expect these estimates to be conservative.”

Why the changes are being made

The Centrelink letter states – in part:
  • “Each year an increasing number of people retire and many receive the Age Pension for far longer than in the past”
  • “The change ensures that taxpayer funded expenditure will be focused on those with lower or moderate wealth”
The first point is frequently reported and then used to imply age pensioners are a burden on society. Additionally, the wording implies that people retire by choice. When discussing this issue with our client we point out that:

1. All too often older Australians would prefer to continue to work but are constrained due to Government policies such as work cover insurance schemes ceasing before the age pension entitlement date, or simply there is no work for older Australians.

2. Most age pension claimants were contributing 3% of their tax to the age pension for the majority of their working life. Some still have their pay slips with that compulsory Government deduction.

3. The age pension is not the largest ‘welfare’ budget item. While the ‘dole’ is approx. 16% and child assistance schemes account for more than 40%. The Conversation states that “As we know from the Intergenerational Report, the proportion of Australians over 65 years is forecast to increase, leading to upward pressure on welfare spending. However, the overall number of Australians who rely on government benefits as their main source of income has been going down from about 28% in the mid-1990s to just under 25% in 2011-12.” Additionally, we know that the proportion of age pensioners in proportion to the tax paying population continues to fall and that trend is forecast to continue.

4. It’s funny that when we consider the kafuffle about the proposed tax concessions for the recent superannuation changes, where a $1.6m limit for an individual was proposed. Compare this to the approx. 25% of that level is applied to a couple’s asset limit before reductions in the age pension are enforced.

What this means for you
The Centrelink letter provides tables on the asset threshold changes and it can easily be interpreted that the changes only impact on those age pensioners whose part pension is being determined by their asset levels. This is not always the case. It is possible that your current part pension is being determined by your income yet the changes could result in your age pension now being determined by your asset levels.

Also be warned about using the web site referred to in the letter 
“where you can access an asset tested rate estimator”. 

This site only considers your assets and as such should only be used by those whose current age pension is being determined by the assets test. If you are unsure please use one of the other age pensioner estimator calculators such as ours

If your payment is cancelled

Be careful of the wording “If you are age pension age or over on 1 January 2017 you will also be eligible for a Commonwealth Seniors Health Card.” And for the Low Income Health Care Card be “automatically be eligible”. This implies that you will not automatically be posted the cards. Many have interpreted the Ministers statement as age pensioners will automatically receive a card for use before 1/1/2017. We will assume the Ministers statement is correct and you will automatically be issued with the card. We will further assume that the Medicare/Health benefits will automatically be linked as you will continue to have the same CRN/CAN Centrelink client number. However, for most age pensioners the benefits are primarily with State and Local Govt based fees such rates, car registration, utilities etc. We are recommending that you contact these organisations to ensure the discounts continue after 1 January 2017. 

The Commonwealth Seniors Health (CSHC) card is an income based card only and does not consider assets. The changes to the age pension relate to assets. Hence if you are ‘on’ the age pension you would already be automatically entitled to the CSHC. The concession by the Government appears redundant.

If the Centrelink letter is accurate and current processing times for the age pension are 4+ months! We expect a deluge of age pensioners applying for the above cards causing significant processing delays. Be warned about the possibility of loss of benefits during the processing times.

We have been unable to determine what the implications are for ‘grandfathered’ age pensioners. Grandfathering only applies until ‘circumstances change’. Is this change by the Government being interpreted as a changed circumstance?

We are also intrigued by the statement regarding the Low Income Health Care Card (LIHC) and CSHC cards that “they will never be income tested so you will retain entitlement to the cards indefinitely provided you continue to meet all other eligibility requirements.” With the CSHC card it is an income based card and has no assets test. So currently you could have $20m in assets – excluding the family home - and receive the CSHC card. The Centrelink letter implies that you can go back to work and receive $200k pa and still get the card - really?

Further Reading

If you are interested in where the age pension is heading, we recommend the Governments National Commission of Audit report. Where the report continues the trend of converting the age pension from a pension entitlement to a welfare payment.

Where, for example the report forecasts that the number of ‘part’ age pensioners will increase and ‘full’ pensions will fall.

Tuesday, September 6, 2016

A house in Bali and a full age pension.

“John” recently “went through” a divorce and considers that he no longer has the funds to purchase a home whilst on the age pension. John is living with his son and their family.

John and his former partner were on the full age pension and both were receiving approx. $660 pf.

This is a summary what he did following the sale of the family home.

He continues to run a small business that requires him to travel to Bali to purchase stock. He determines that the company would benefit if he “bought” a house in Bali to use when he visits. You can not own property in Bali but it will be treated as an investment property for Centrelink purposes. The property is valued at $300k.

John also has a further $200k in super.

As a single age pensioner, without assets, he would have been entitled to approx. $870pf. Now with the above assets his age pension falls to nearly the same as what he was receiving as a part of a ‘couple’ to $660pf. 

As there is no international agreement with Indonesia, John is also worried that as he no longer has the family home he may be considered a non resident. John uses the $200k in super to enable his son to renovate the house to “pay the costs associated to build a granny flat on someone else’s property or the costs to convert someone else’s property to suit your needs and establish a lifetime right to live there”

John's age pension now rises back to the full single age pension rate – from $660 to $870pf.

Is $0.5m in super really a “small amount”?

When providing advice to a Centrelink age pensioner, a recent article in the mainstream press (7/9/16) suggested “for a relatively small amount, such as $500,000”. 

Of course “relative” can mean a number of things and is dependent upon - relative to what. So let’s look at that relativity.

First we look at what $500k in super means to a single age pensioner – as was the case for the press article. Let’s assume that this was the total amount of assets held by the age pensioner.

The age pension would be reduced from $870 to approx. $440pf for that “relatively” small amount. In 2017 that age pension is expected to be reduced by a further $7,700 pa. A weekly loss to the age pensioners 'budget' of nearly $150 per week from the current 2016 pension.

Back to judging whether that $500k is a relatively small amount.

In December 2015 the Association of Superannuation Funds of Australia Ltd(ASFA) published the report “Superannuation Account Balances by Age and Gender”

So we will pick out a stat to assist with judging that relativity. The data relates to “average superannuation balances at the time of retirement (assumed to be between 60 to 64 years of age) in 2013/2014”.

So the medians – where 50% of the population has a lesser amount – the super balances are:
            $100,000 for men
            $28,000 for women

That is, for men, 50% of the retiring population has a superannuation balance of less than $100,000. For those applying for the age pension it is presumably far lower.

Therefore, the above mentioned relatively small $500,000 is at least 5 times that of the median for all retiring males and nearly 20 times that for women!

Update 8/8/16 – since we published this article we have received a number of comments regarding the above statistics. So we should expand in an attempt to explain.

The above median super balance of $100,000 for men, and $28,000 for women, is the median balance. That is, 50% of people have amounts less than that and 50% have amounts greater than that.  Now it is the average super balance that is often reported. From the same ASFA report the “average superannuation balances at the time of retirement (assumed to be between 60 to 64 years of age) in 2013/2014 of $292,500 for men and $138,150 for women, many recent retirees will need to substantially rely on the Age Pension in their retirement.”

Much of the difference between median and average is attributed to the number of people with large super balances and those without any super.

To look at the average balance situation for a ‘household’ the ASFA report states that the “The average total superannuation balance in 2013/2014 for a household headed by a person 60 to 64 years of age was around $355,000 with a median value of $110,000.”