Currently the full Age Pension for a single person is $22,426 per annum, and for couples combined it is $33,808 per annum. Once an individual or couples’ income and assets rise above a certain level, their Age Pension is reduced. Assets above the lower limit reduce the age pension entitlement by $1.50 per fortnight for every $1,000 the assets exceed that limit. Income above the lower income limit reduces the pension entitlement by $0.50 for every $1 in excess.

The table below provides a summary of this for homeowners – those who do not own a home have higher limits.

Say a pensioner couple who owned their own home had $250,000 in investments –  they could receive the full pension plus the income from their investments; which at five per cent per annum would be approximately $12,500 annually. This means that this couple would have total income of $46,308 per annum, without spending their investment capital.

Changes suggested in the recent Federal Budget increase the rate at which the Age Pension is reduced when assets exceed the lower limit, with the proposed reduction being $3.00 per fortnight as opposed to $1.50. This means that a home owning, pensioner couple with assets in excess of $823,000 would no longer receive a pension. For singles who own their home, the new cut-out point becomes $547,000.

The proposed changes are planned to commence on 1 January 2017, and all pensioners with assets over the asset test limits will be affected.

A concession is that those with lower asset levels will be able to have more assets before their pension starts to reduce – for home owning singles the new lower limit will be $250,000 and for couples $375,000.

Returning to the retiree I mentioned earlier who was splurging on a holiday, I suspect she is not the only one. I dare say one of the key issues as a result of the changes is whether retirees should start adjusting their financial arrangements to ensure they qualify for the Age Pension once the new rules start in 2017.

If you are a pensioner who will be affected by the higher pension reduction rate for assets over the limits, spending some of your money on travel, your home, or even gifting to relatives (within the gifting limits) could be strategies to reduce your assets and maintain your pension.

But what is the real benefit of such action?

Let’s say you are a home owning couple and have $850,000 in investments and superannuation.  Currently your Age Pension entitlement would be a combined $11,740 per annum. With investment earnings of five per cent on your assets, you would also have around $42,500 in investment income, which provides a total income of around $54,000 per annum. According to the ASFA Retirement Standard, this is almost sufficient for a “comfortable” retirement lifestyle.

Under the proposed changes, the aforementioned couple would no longer receive an Age Pension, thus reducing their total income to $42,500 per annum. To maintain their lifestyle they would need to start drawing on their investment capital to replace the lost pension income.

The other strategy would be reducing assets to increase their age pension entitlement. 

If the couple were to spend $20,000 on an overseas holiday, update the kitchen and bathrooms in their home at a cost of $50,000 and gift $10,000 to their children, their assets would be reduced to $770,000. This would allow them to retain a small pension of approximately $2,900 per annum.

Under this scenario, they would also have less money invested so their investment earnings would reduce to around $38,500 per annum, giving them a total income of $41,400 per annum. They would still need to draw on capital to maintain their lifestyle.

Their actions have resulted in retaining a small part pension, but they are also approximately $1,000 per annum worse off than if they had not spent their money and lived off the earnings of their investments instead.

The effective return of an increased age pension is around 7.8% per $1,000 of assets reduced, however this ignores the loss of investment earnings on the capital spent to reduce the assets. Also, they’re now partially reliant on government welfare and who knows what the next amendment will be.

I encourage part-pensioners to exercise caution when restructuring their financial affairs to retain the Age Pension. The pension rules and eligibility criteria are subject to change, your investments can increase in value (which could undo your strategy), and your future need for capital is also unknown. 

Obtaining professional financial advice before acting is a must.

The information presented is General Advice only and does not take into account your specific circumstances.  Before acting on the information, you should first seek advice from an appropriately qualified professional.