With the deadline of January 1 for the new pension assets test drawing nearer, many people are counting the days until the new regime kicks in and their pensions are cut or stopped entirely.
But not everyone will be a loser from the new system. While around 318,000 pensioners will lose, another 170,000, or 4.3 per cent of pensioners, will actually find themselves better off.
That’s because the new system, while taking away from part pensioners with assets outside the family home, actually gives to full pensioners by boosting the assets they are able to own outside their home. The new deal looks like this.
They are quite significant changes. Single homeowners can own 19.6 per cent more assets and keep the full pension. For single non-homeowners it’s 24.8 per cent, while for home-owning couples it’s 26.4 per cent and couples without a home it’s 28.34 per cent.
Of course at the other end of the scale there are losers. They are the people who are hit by the more steeply declining pensioner assets test taper rate.
The cuts here are steeper than the benefits gained by the winners in percentage terms. Single homeowners will see allowable assets reduced by 31.7 per cent before the pension cuts out, while for non- home-owning singles it’s 21.5 per cent.
For couples, it’s a cut of 31.8 per cent for homeowners and 23.7 per cent for non-homeowners.
If you’re in the loser category, Don Hamson, an investment advisor with Plato Investment Management, said “the reduction in part pensions can be quite large”.
Assets give you options
“We estimate that a home-owning couple with $800,000 in other assets currently receives $567.15 per fortnight in part pension and we expect this to fall to just $47.70 per fortnight,” Mr Hamson said.
“That’s a cut of $500 per fortnight or $13,500 per annum. Similarly, a single homeowner part pensioner with $550,000 in assets will miss out completely on a part pension, losing some $365 per fortnight or nearly $10,000 per annum.”
To make up that difference in the example, the couple would need to draw down their asset base by 1.7 per cent a year. For the single it is around 1.8 per cent.
Another approach for those whose non-housing assets are in superannuation is to look at returns on your fund.
“If the $800,000 in assets earns 7.8 per cent per annum, then the pensioner can offset the loss in part pension. We think this is a better option, and is more consistent with the way pensioners behave,” Dr Hamson told The New Daily.
Pensioners doing that can live on income and put their assets aside for a rainy day and offset what is known as “longevity risk”, the danger of living longer than their money.
The question to ask is “is a 7.8 per cent return realistic?” Super consultancy Chant West’s performance tables suggest that it is a bit of a stretch for a balanced fund, but those choosing a growth option could come close to that performance.
For those not prepared to risk the “growth” option, the choice of a balanced fund along with using a small amount of capital each year should stretch their retirement money out considerably.
Of course, for those with assets in property, opportunities to increase yields are far less available.