Strategies to Consider
After qualifying the financial impact of the legislative changes, you might consider strategies available to maximise the Age Pension entitlements and your total retirement income.
Any necessary major purchases, such as a new car, improvements in the family home etc. can be brought forward – leading to an increased entitlement sooner.
The retiree can gift $10,000 p.a. or $30,000 over 5 years before “deprived asset” provisions click in.
A fixed term annuity has a linear rundown of purchase price and may help with the asset test as long as acceptable purchase terms can be obtained.
Since superannuation is not counted as an asset until Age Pension age, it is worthwhile (if relevant) to have as much super in the name of the younger person as possible. This can be organised with a withdrawal from the older person’s account and re-contribution to the younger individual before they reach Age Pension eligibility age subject to contribution caps.
Pre 01/01/2015 Account Based Pension(ABP)
Investigate whether the grandfathered income test (i.e. based on actual drawn amount less deductibles) leads to a better outcome than the new deemed income test. For those with a partner, when the first person passed away it may or may not be possible to retain eligibility to the grandfathered assessment option.
A funeral bond is an investment product that helps people save for funeral expenses, and the money can only be withdrawn after a person dies. Centrelink does not count funeral bonds up to $12,500 per person in its pension assets test.
There can be a tendency to overly focus on Age Pension entitlements. However, the real main issue is the availability, level and security of retirement income. This opens up a far wider dialogue than the focus above. The purpose of this section is to detail a few items which you may like to consider and research further for incorporation into your retirement plan.
Sustainable retirement income
Sustainable retirement income is sourced from the Age Pension, private assets and the investment earnings on those assets. The level of income drawings can be increased if the level of return can be increased. However, this also increases the volatility and risk of adverse outcomes. The sequence of returns also can’t be ignored in the drawdown phase. This is a major aspect of retirement planning in its’ own right and there are a number of techniques and strategies that can be used to manage these risks.
Old Legacy Pension
If there are old legacy pension then these can be re-structured, subject to the value and importance of the asset test exemption into income streams that can generate more retirement income drawdowns i.e. eliminate adequacy reserves. Non account based pensions may have some favourable asset test aspects. The timing and form of any large lump sum withdrawals needs consideration. Postponing the age of retirement has a major impact on the level of income drawings that can be sustained in retirement.
Part Time Work
The Age Pension rules have an incentive for pensioners over Age Pension age to have some part time work. The work bonus increases the income amount a pensioner can have before it affects their Age Pension. The first $250 p.f. of earned income is not assessed and is not counted under the pension income test. For example, a single pensioner could earn up to $414 p.f. i.e. $250 plus the $164 threshold and still receive the maximum rate of pension. Unused parts of the $250 p.f. accrue in a Work Bonus income bank up to a maximum of $6,500. The income bank amount is not time limited and can (if unused) carry forward even across years. It is employed income and does not include income from self-employment or business income.
Senior Australians and Pensions Tax Offset
Finally, the available of Senior Australians and Pensions Tax Offset together with the tax free threshold means at some stage there may be no tax disadvantage to hold retirement assets outside of the superannuation system. This can lead to administrative cost saving that can be diverted to retirement income.
As with any financial planning issues, the plan should be revisited and revised from time to time to take changes in circumstances and legislation into account.