On Tuesday 12 May 2015, Federal Treasurer Joe Hockey released his second budget. One of the biggest changes was to the asset test assessment for the Age Pension. As part of the budget, the government is formerly abandoning its planned changes to indexation, announced in the previous budget. Instead, from 1 January 2017, there is proposed to be two changes;

Firstly, the assets thresholds for qualifying for a full pension have been raised. This will have effect of increasing benefits for those with lesser amounts of assets. It will mean that the maximum thresholds for full pensions will become;

Blend Model	Income Model	Growth Model
September 2022	September 2022	September 2022

Secondly, the pension taper rate (the rate at which the pension reduces above the thresholds) will increase from $1.50 a fortnight per $1,000 to $3.00 a fortnight. For many part pensioners, it will mean significant age pension reductions and possibly a complete loss of pension benefits.

The asset levels at which pensions will no longer be paid are;

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Under these proposed reforms, the hardest hit will be part pensioners, particularly those with assets that are close in value to the new cut-off levels above.  Pensioners at around this level could go from receiving a decent part pension to little or nothing.

The table below illustrates the impact on a homeowner pensioner couple at various asset levels.

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* Note: Pension estimates based on projected pension rates at 1 Jan 2017

As can be seen, the impact at these levels can be great.  This is likely to put investment capital under pressure.

As an example, let’s consider a retired couple with $730,000 in superannuation and $70,000 of other assessable personal assets (eg cars & contents).  Based on current pension rates, they would lose over $13,000 per year.  This would accelerate the erosion of their retirement savings.

If we assume they would like $65,000 per annum to fund their lifestyle, then the impact of the changes on their super balance can be illustrated as follows;

Assumes investment return of 7% pa net, with inflation of 2.5%. Amounts shown in today’s dollars.

For this couple, their capital is expected to run out 3 years sooner as a result.  In order for them to ensure their capital lasts the same amount of time they would either need to decrease their expenditure by $2,000 pa (to $63,000) or find a way to increase their return to 7.7% pa (which would involve more risk).

If this couple were still saving toward retirement, then they would actually need to have an extra $105,000 in super invested to provide the same capital longevity.

To provide some relief to those affected, the government will ensure that those who lose pension benefits will have access to the Commonwealth Seniors Health Card or Health Care Card, so that many of the same benefits can be accessed.

Although the change is still over 18 months away and has yet to pass through the Senate, retirees and pre-retirees alike should consider the impact and make the necessary changes.  The Age Pension is the single biggest item of Government expenditure – accounting for 10% of all government outlays. Even if this measure is not passed or watered down, the fact remains that with an aging population, the current system may not be sustainable.  So changes are inevitable.

For those who are already retired, it is even more important that their situation is structured to deliver the best possible investment, tax and social security outcomes.  For those approaching retirement the bar has been set even higher, with increased savings now required in order to sustain a long and enjoyable retirement.

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If you would like to discuss the above changes to the budget please call 1300 ELSTON or email info@elston.com.au and an adviser will be in touch.