Hockey dams the age pension

The federal budget has sent a clear message: If you’re approaching retirement, don’t bank on money the government may not pay you. If you’re there already, it’s time to tighten your belt.

Key Points

  • No new taxes on superannuation...
  • ...but savings in age pension payments announced
  • Cutoff limits for benefits to drop significantly

Joe Hockey promised “no new taxes on superannuation” on Budget night but found a way to save $2.4 billion in age pension payments.

The secret doorway to these savings is the cutoff limits to benefits, and Australians who are better prepared to pay their own way in retirement will see the welfare tap slowly turn off.

From 2017, about 320,000 retirees will see their part pension payments fall or disappear altogether as their level of assets excludes them from the benefit.

The assets test for full pension will still exclude the family home, but from 2017 the threshold for homeowners will increase from $202,000 to $250,000 for singles and from $286,500 to $375,000 for couples.

Above these levels, the pension will be reduced by $3 per $1,000 in assets. The current tapering rate is $1.50 per $1,000.

The cut-off points for part pension will drop significantly, as shown in these tables from the office of Scott Morrison, the Minister for Social Services.

Table 1: Homeowner couples
Assessable assets

Annual age pension at $1.50 taper rate

Under budget proposal

$400,000 $30,965 $32,973
$600,000 $23,165 $17,373
$800,000 $15,365 $1,773
$1,000,000 $7,565 $0
$1,200,000 $0 $0
Table 2: Homeowner singles
Assessable assets

Annual age pension at $1.50 taper rate

Under budget proposal

$400,000 $15,776 $11,466
$600,000 $7,976 $0
$800,000 $0 $0

Assessable assets include anything that generates income or can be converted to cash for income. For most people on the age pension their biggest assessable income will be their superannuation balance.

Under the proposal, a couple with $600,000 in assets will have about $6,000 less a year to live on -- more than $100 a week missing from their wallets.

If their balance was $400,000, however, they’d be better off by $2,000 a year.

A couple who believed the $200,000 higher balance will generate income above the loss of $6,000 in pension income will not be bothered.

Anyone with less confidence in how their money is being managed might be worried.

Property play off

On the surface, the Budget proposal almost looks like an incentive to take money from savings and put it into the family home. If funds are shifted into the family home, they are not counted in the pension test.

That hardly makes sense, when property looks so expensive. Besides that, many pensioners already live in houses that are too large. (Although their offspring may not see it that way, as hopeful beneficiaries.)

A better solution would be to free-up equity in property via a reverse mortgage … or downsize.

But the Budget is an indication of which way the wind is blowing for Australians approaching retirement. No-one can expect welfare payments to become more generous. They won’t.

Savings in super, and outside it, will be the fallback for most of us.

It’s not over yet

Changes to tax in super were not included in this budget, but the topic will almost certainly be addressed in the government’s response to the Financial System Inquiry and its tax white paper, along with a decision on limited recourse borrowing in self-managed super funds.

Instead of indexing pension payments to inflation, as suggested before the budget, Canberra will stick with the current method of wages growth being used as a benchmark.

The government expects at least 100,000 homeowner couples and 27,000 homeowner singles will stop receiving any part pension as a result of the planned changes, and more than 160,000 retirees will see their part pension payments reduced.

As a concession to those who may lose their pension entitlement come January 1, 2017, they will be issued a Commonwealth Seniors Health Card.

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