A budget hit for retirees

For retirees, and those nearing retirement, the 2014 Federal Budget contains a few surprises.

And the measures announced today, which include a series of structural changes to the Age Pension – underscored by the expected increase in the pension entitlement age to 70 – are a firm pointer to further reforms down the track.

The Government vowed during the last election campaign that it would make no major changes to superannuation in its first term. It has mostly lived up to that promise, and indeed some of the “minor” changes unveiled in the budget today are a positive for retirees and superannuation.

But there are also some negatives, with the Government aiming to save about $250 million a year by axing the “seniors supplement” for holders of the Commonwealth Senior Health Card. In addition, any untaxed superannuation income will be included in the eligibility assessment for the seniors card – a move which will restrict access for some retirees.

“If we wish to have a sustainable age pension system that looks after those who need it most, now and into the future, we must reform it,” said the Social Services Minister, Kevin Andrews, in his Social Services addendum to the budget papers.

The Government has announced it will “rephase” the current superannuation guarantee rate, starting with a rise to 9.5% from July 1 this year. It will remain at that level until June 30, 2018, and then increase by 0.5% each year until it reaches 12% in 2022-23.

For Australian workers, who in effect have been asked to work for longer until they are eligible to receive an age pension – if they ultimately qualify under the assets and income tests – more employer super contributions are a trade-off.

The Government has said the latest change will now also give certainty to businesses and “build confidence in the retirement system.”

Below are the key retirement and superannuation measures announced today:

Increasing the pension age

The former Labor government moved to increase the pension age to 67 from July 1, 2023, and the Abbott Government is continuing the momentum by gradually increasing the age pension age to 70 by July 1, 2035. The measure will not affect Australians born before July 1, 1958.

The Government will also index pensions to inflation from September 2017, which it says will help ensure the age pension is sustainable so pension recipients can keep up with rises to the cost of living.

A great relief to age pension recipients is that the Government has confirmed it will not include the family home in the means test for the pension.

However, the Government has announced that to ensure people with similar incomes are treated consistently, untaxed superannuation income will be included in the income test for the Commonwealth Seniors Health Card for new recipients.

Seniors Health Card Changes

The Government said it will meet its election commitment to senior Australians to index the eligibility thresholds for the Commonwealth Seniors Health Card (CSHC) from September 2014.

This change means modest variations in income will not affect eligibility, which will reduce uncertainty for people in this group. This will be the first time the thresholds have increased since 2001.

To ensure people with similar incomes are treated consistently, from January 1, 2015 superannuation will be treated for new recipients in the same way for the CSHC income test as it is for the age pension.

Currently CSHC holders also receive the seniors supplement, $876.20 per annum for singles and $1,320.80 combined for couples.

The Government said that to help ensure that payments to senior Australians remain targeted to those who need them the most, it will cease payment of the seniors supplement received by those eligible for a CSHC entirely after the June 2014 payment.

A reset to deeming levels

For the purposes of the pension income test, the Government said it will change how it deems the return from a person’s financial assets.

The Government has announced it will reset downwards the deeming thresholds from $46,600 to $30,000 for singles and from $77,400 to $50,000 for pensioner couples from September 2017.

Minister Andrews said this will ensure that the lower deeming rate applies to a level of cash that a prudent person may choose to have on hand, such as in a readily accessible bank account.

Fixed means test thresholds

All pension assets test and income test thresholds will be fixed for three years from July 1, 2017. Maintaining these thresholds will not lead to any reduction in the rate of the pension.

This means that the amount of income and assets that individuals and couples can have before their pension payment begins to be reduced will remain constant for three years, rather than being automatically indexed in line with the CPI on July 1 each year.

Changing the Excess Contributions Tax

The Government has announced it will take a softer approach to excess non-concessional super contributions by individuals, which are currently taxed punitively at the top marginal rate.

Excess contributions, above the relevant age contribution caps, are often inadvertent and sometimes can be outside the direct control of the contributor.

“In Opposition, we called on the previous government to fix this and promised that we would if they didn’t.”

The Government said that any excess contributions made by individuals after July 1, 2013, breaching the non-concessional cap, could now be withdrawn.

If an individual chooses this option, no excess contributions tax will be payable and any related earnings will be taxed at the individual’s marginal tax rate. Individuals who leave their excess contributions in the fund will continue to be taxed on these contributions at the top marginal rate.