How the pension axe could fall

Pensioners are in the government’s sights … and here’s how you may get hit.

Summary: The federal government is reviewing a number of options relating to pensions and retirees from the National Commission of Audit document released last week. What actually happens will be announced in next week’s budget, but here are some of the potential changes on the table.

Key take-out: Superannuation taxes could be effectively raised, without resorting to taxing pensions, while current government benefits such as the Seniors Health Card could be harder to secure if qualifying conditions are changed.

Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.

The federal government is reviewing a number of options presented in last week’s National Commission of Audit (NCOA) document that could impact access to the age pension, and certain benefits available to retirees.

We’re unlikely to know exactly what changes will be announced until the federal budget next Tuesday evening, but some of the potential changes on the table that would involve winding back the generosity of tax-free super pensions without actually lifting taxes.

Importantly, the Government doesn’t have to actually reverse the rule around tax-free pension income and start taxing pensions, as the previous government announced it would do (with its plan to tax pension funds earning more than $100,000).

It could simply raise the effective marginal tax rate (EMTR) applicable upon receipt of a tax-free pension. You might not be taxed on the pension itself ... but the Government could withdraw some other government benefits you receive instead.

The Abbott Government says Australians are going to have to get used to paying higher taxes and receiving fewer government benefits – “the end of the age of entitlement”. And higher EMTRs are built into the thumping National Commission of Audit (NCOA) document, delivered late last week.

The government hasn’t endorsed the 60-odd recommendations from the report. But there’s a strong chance many of them will get a run, and possibly even with bipartisan support in the coming years.

Commonwealth Seniors Health Card

The most obvious higher effective marginal tax rate is the recommendation that a “deemed” income from the tax-free super pensions be used to add to the “adjusted taxable income” of retirees, to impact on their access to a favourite of pensioners, the Commonwealth Seniors Health Card.

Currently, if you earn under $80,000 as a couple ($50,000 for singles), you can access the Health Card, which can deliver thousands of dollar in benefits each year. Tax-free super pensions do not count towards this income test.

The NCOA has recommended that it does deem income from pensions, which would instantly knock out tens of thousands of the more than 300,000 holders of the card. (There was no recommendation from NCOA for a phased introduction of this.)

The main issue raised by the NCOA is the different treatment of similar sums of money inside and outside of super.

If a couple had $2 million in term deposits earning 4% outside super, they would pay income tax on the $80,000 earnings, plus fail to gain the Seniors Health Card.

However, if the money was sitting in a super pension, no income tax would be paid, and the Seniors Card would be received.

The cost of providing incomes in retirement is one of the largest costs to the taxpayer. And the recommendations from the NCOA aim to reduce the cost over time by reducing the benefits paid.

Raising the preservation age

The preservation age is currently on its way from being moved from age 55 to age 60. The NCOA wants that to continue on the same trajectory to age 62 instead.

That would mean the following changes (in red) to the preservation age table.

Table 1: New super preservation ages

Existing/New

Born after ...

Born before ...

Preservation age

Existing

30/06/1960

55

Existing

1/07/1960

30/06/1961

56

Existing

1/07/1961

30/06/1962

57

Existing

1/07/1962

30/06/1963

58

Existing

1/07/1963

30/06/1964

59

Existing/new

1/07/1964

30/06/1965

60

New

1/07/1965

30/06/1966

61

New

1/07/1966

and after

62

Then, after that, and well flagged as a likely recommendation, the preservation age should move in lock-step behind future rises in the age pension age, allowing access to your super five years behind access to the age pension.

Age pension age increase

The secret that wasn’t. It’s recommended that the age pension age be moved out to 70. It’s currently scheduled to rise to 67 in 2023.

But the surprise is the recommendation to turn increases in the future into a formula, based on increases to life expectancy. The NCOA wants the age pension qualifying age to be linked to 77% of the average life expectancy for someone at age 65, which is expected to rise from 86 in 2014 to 90.7 in 2053. This would create the age pension age of 70.

This would have been slower than some would have expected to come from the recommendations.

Lowering the age pension

The NCOA wants to lower the overall age pension, over time, by shifting the link from male average weekly earnings to 28% of average weekly earnings of both sexes.

This would see a considerable reduction in the pension paid over time. By 2030, based on current projections, the age pension would be about $1500 a fortnight. Under the proposal, it would be approximately $1230 a fortnight.

Removing the principal residence exemption

Scott Francis is covering this in more detail in his column today, so I’ll leave this largely to him.

However, the NCOA’s commentary suggested that more Australians who have worked to build up equity in their home, or had paid it off, could be expected to draw down on that equity as they age via reverse mortgages.

You can expect an explosion in that sector of the mortgage broking industry in about 13 years.

“Financial products exist which allow homeowners to draw down on the value of their home over a period of time ... a high threshold will mean that there is significant equity that would not be assessed,” the NCOA said.

Increasing the tapering of the age pension

The NCOA said that Australians can currently earn up to about $47,000 in private income before they no longer get an age pension, because of the taper rate of 50% on the income test.

The NCOA would like the taper rate increased to 75%, which would knock you out of getting a pension at an income in today’s dollars of about $32,700.

Wrap-up

This is, in essence, what the National Commission of Audit (NCOA) has delivered in last week’s thumping document, which takes a very broad and long-term view on how to cut the cost to government of assisting with income streams for Australia’s oldies.

For the great unwashed, there have always been two irrational fears when it comes to retirement incomes.

The first is that the government age pension won’t exist in the future. It always will. The more realistic concern has been on how generous it would be. And the answer is that it will be less than what it is now.

The second is that their superannuation won’t exist when they reach retirement. The NCOAs recommendations, if followed, will mean that there will be a greater emphasis on private super pensions and being able to fund your own retirement, so any government plan will have to have superannuation security at the forefront.

The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.


Bruce Brammall is director of Castellan Financial Consulting and the author of Debt Man Walking. E: bruce@castellanfinancial.com.au


Graph for How the pension axe could fall

  • The Australian and US governments have reached an agreement to exclude SMSFs and superannuation from the United States’ Foreign Account Tax Compliance Act (FATCA). “This means that any SMSFs that have a US citizen as a trustee or member don’t have to adhere to the strict FATCA reporting compliance, saving considerably on costs for trustees and their advisors,” said Andrea Slattery, chief executive of the SMSFS Professionals’ Association of Australia (SPAA).
  • SMSF trustees could be slugged with more expensive aged care accommodation fees amid new reforms, Taxpayers Australia has warned. Under the new rules, means testing for aged care accommodation will be based on the income and assets of the recipient rather than income alone. It will affect trustees looking for residential care after July 1 this year.

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