How to boost your pension under the new threshold rules

To help you enjoy a more comfortable retirement, here are some tips to make the most of the new Age Pension rules which took effect on 1 January 2017.

When you’re relying on the Age Pension to fund your retirement, every dollar you receive from your entitlement has an impact on your standard of living.

Your Age Pension is means tested using both an income and assets test, with the lower result being the age pension you are entitled to.

As a result of the new rules for the Age Pension assets test which are now in place, your entitlements calculated under the assets test may have gone up or down, or even been reduced to zero.

But, with these changes comes opportunity, as there are ways to boost your pension under the new threshold rules.

To help you enjoy a more comfortable retirement, here’s some tips to make the most of the new Age Pension rules.

Reduce assessable assets to boost your pension

One significant effect of the changes to the assets test rules is that that the “taper rate”, the rate at which your pension reduces under the assets test with each dollar of assets you hold above the lower threshold, has doubled.[1]

Previously, for every $1,000 of assets you owned over the lower threshold, your pension was reduced by $1.50 per fortnight.

Effective from 1 January 2017, your pension will be reduced by $3 per fortnight for every $1,000 of assets you own over the lower threshold.

Consequently, if the threshold changes are likely to have a negative impact on your retirement income, it may be worth looking at ways to lower the value of your assessable assets to boost your pension.

For many people, these strategies will be twice as effective under the new rules compared to the previous rules. Here are some options:

• Top up your spouse’s super. If your spouse has not yet reached Age Pension age, their super isn’t counted towards your combined assets. So one way to reduce your assessable assets could be by making a contribution to your spouse’s super while they remain under pension age.
• Gift money to your children or grandchildren. You’re allowed to make financial gifts of up to $10,000 per year, or a maximum of $30,000 over five financial years. This amount won’t count towards your assessable assets — but if you go over the cap, the excess will be assessed as a ‘deprived asset’ and counted towards your assets for five years from the date of the gift (it is also deemed under the income test during that time).
• Increase the value of your home. As your home isn’t included in your assessable assets, it may be worth investing in renovations that could raise the value — provided you’ll get the additional investment back via a higher sale price if you sell the property in the future.
• Buy a lifetime annuity. Lifetime annuities can provide advantages under the income and assets test as they are classified as long term income streams that are not subject to deeming and have a reducing asset value. Depending on the annuity, Centrelink may reduce its assessable value by a deduction amount every six months. At the same time, there is a benefit of a regular income from the annuity into older age.
• Prepay your funeral expenses. If you pre-purchase a burial plot, pre-pay your funeral expenses or purchase a funeral bond of up to $12,500[2], the amount you spend will reduce the value of your assessable assets.

Additionally, it is recommended that you should revalue your assets and update Centrelink with the new valuations as household items and motor vehicles, in particular, lose market value over time.

More importantly, these valuations could be worth checking as many retirees have not reported changes in the value of their household goods for some time.

Diversify to take more risk

Another approach to boosting your pension in light of the Age Pension changes is to consider taking more risks with your investments by diversifying between both defensive and growth assets.

If you expose your investments to growth assets, such as shares, they can produce higher returns over the longer term. Investments that have provided higher returns over the longer term have also tended to produce a wider range of returns.

So while there is a higher chance of losing money, growth assets can also give you a better chance of achieving your long-term objectives. Selecting the investments that best match your investment needs and timeframe is crucial in managing this risk.

Get the right advice

While you’re seeking to enjoy a comfortable retirement lifestyle, it can be tricky to know exactly how the new thresholds might affect your financial position.  This is where we can help. To find out more about the new thresholds and how they may apply to your situation, please contact us.

Source: Colonial First State

[1] https://www.humanservices.gov.au/customer/enablers/changes-pension-assets-test

[2] The Funeral Bond Allowable Limit as at 1 July 2016 is $12,500 and is indexed in line with CPI pension increases every 1 July (https://www.humanservices.gov.au/customer/enablers/funeral-bonds-and-prepaid-funerals).