How to qualify for the age pension if you're just over the threshold
This week we bring you part 2 of Why you only need $253k in super to retire.
If you're on the cusp of receiving the age pension but have too many assets, there are some strategies that can potentially help you qualify.
Financial planner Mark McShane recommends contacting the technical staff at Services Australia for help to optimise what you can get.
REST Industry Super's Greg Fleming describes the strategies as "sheltering" your assets.
Fleming says the most popular and effective strategy for REST's retirees involves a couple with an age difference. When the older one reaches 66, they can receive the age pension because their partner's super isn't counted as an asset.
Superannuation money can be moved from the older partner to the younger member, who is still a few years from age pension age.
Using the bring-forward provisions, you can move up to $300,000 ($330,000 from July 1) into your younger spouse's super account. This can increase your eligibility for the age pension as well as for valuable benefits, such as the pensioner concession card until the younger spouse also reaches age pension age.
"You only need $1 of age pension to qualify for benefits such as the pensioner concession card," says McShane.
Upgrade your home
If you have been putting off updating the bathroom and the kitchen for years, it could be a smart move if you have the money available.
Every dollar you spend on renovating your house will get you closer to the age pension.
Give it away
One of the most common questions that financial planners are asked is: How do I help my kids get into the property market?
Financial planner Peter Humble says clients who want to access the age pension frequently say they will give some of their money to their kids. But Centrelink has gifting rules that prevent people doing this and claiming the pension.
Individuals and couples combined can gift up to $10,000 each financial year, or up to $30,000 over a five-year period, and remain within the gifting-free area.
If you give away more than $10,000 it is still counted under the age pension assets test for the next five years. If you give your child a holiday house or a block of land, for example, the value will also count for five years.
Watch out if you gift too many assets too soon because you might run out of money in your old age. With uncertainty surrounding health care and aged care costs, you need to have money set aside. people are living longer, and they often underestimate all the costs in old age.
Buy a funeral bond
You can prepay some or all of your funeral costs and avoid having them counted in your assets test. The allowable limit is $13,500 and it will change every July 1.
Take cash out of your home
If you own your home in retirement and want more money for your golden years you can unlock some of the property's value. There are several ways to free up some of the capital. One strategy is to downsize and move to cheaper housing, unlocking some of the equity. Another is to take out a reverse mortgage, where you borrow against the value of your home.
Around 1.8 million age pensioners own property, according to Paul Rogan, CEO of Pension Boost, a private company that helps retirees access the federal government's Pension Loans Scheme.
With prices reaching an average $1 million for a house in the capital cities and $565,400 for a unit, the family home
is the biggest asset for most people, outstripping superannuation. But selling it is an emotional decision.
Greg Fleming, REST super's head of advice, says its retiring members have little interest in taking out a reverse mortgage on the home they have fought so hard to own. "A home is a prized asset," he says. People would prefer to do more budgeting than borrow against their home. He says that retirement looks a lot healthier for people who have paid off their home.
Financial planner Mark McShane prefers downsizing to reverse mortgages with their fees and interest costs.
Story Wealth's Anne Graham says downsizing can be a risky strategy, which works well if it involves moving from the city to a regional area. But moving from one suburb to another can backfire because it may not unlock as much money as expected. Sometimes people spend the same, or even more, trying to find something they like.
If you don't want to move, you can always borrow against the value of your home and take out a reverse mortgage. This allows you to stay where you are and gives you some extra cash. Or you can sell part of your property through what is known as an equity release product.
Services Australia has the Pension Loans Scheme (PLS), which allows people to use the capital they have tied up in real estate as a non-taxable loan. It can be for either a short time or an indefinite period, and is paid in
fortnightly non-taxable instalments.
The scheme has been around for 35 years but recently has had a surge of take-ups because it has been opened to self-funded retirees as well as people on the age pension. Around 3700 Australians have used the PLS, which was mentioned in the government's Retirement Income Review as an option to boost income. The PLS lends on all sorts of property, including farms.
Services Australia general manager Hank Jongen says the PLS is improving the customer experience for people when they claim and manage their loan online. It has more specialist telephone staff to answer enquiries and service customers. It has introduced a loan calculator to help people test their eligibility and estimate loan balances.
It has electronic loan repayments and new online services for customers to change loan terms, print or request itemised statements and complete regular loan reviews. It also has a joint online claim for partnered customers with more relevant questions.
The PLS amount is based on age and increases as people age. It works like this:
Margaret, 70, starts her PLS of $400 a fortnight from March 2021 to September 2026. She will have received $86,600 and her loan balance, including interest at 4.5%pa and costs, will reach $105,420.
At 4.5%pa, even if pension payments are ceased, the outstanding loan will increase by 50% over nine years. For example, if you owe $50,000 when you cease pension payments, over nine years this will increase to $75,000.
At the previous rate of 5.25%, which was reduced in January 2020, the debt would have grown to $83,000 over nine years.
Paul Rogan says the typical age of a retiree who approaches Pension Boost is 73. They have been on the age pension for several years and need extra money for a broad range of reasons. These include paying for home repairs, credit card debt, an interstate trip to see the grandchildren, or to pay the energy bill or healthcare costs.
This year 150,000 Australians will retire. Many will join the 63% of retirees on the full or part age pension.
One of the three pillars of the retirement income system, along with super and homeownership, the pension is designed to be a safety net. It hovers just above the poverty line for singles.
Financial planner Peter Humble hears from people in their 30s, 40s and 50s that there is no point building up their superannuation with extra contributions because they will get the age pension.
"I always say: what makes you think there will be a pension?" he says.
The pool of working people who are taxed to pay for age pensions is shrinking. Thirty-five years ago, there were 6.7 working Australians between the ages of 16 to 65 whose taxes helped support retirees. By 2030 there will be only three workers, according to former prime minister Paul Keating on the 7.30 Report's recent special on the future of retirement.
"So, you have three people looking after everyone over 65 when before there were 6.7 people," he said. "That burden means that you want superannuation to withdraw the burden on the age pension, so the few taxpayers left in the system are carrying it."
The federal government argues that a growing ageing population is putting pressure on its finances. It has made it harder for people to receive the age pension by tightening the eligibility. Also, in 2014 it changed the way the age pension is indexed.
Until then, the pension was increased each year according to the general cost of living as measured by the CPI, pensioner specific living costs and the relativity to average earnings. The 2014 budget changed the indexation, basing it solely on the CPI. It created the potential for the age pension to grow more slowly than average incomes, so that pensioners become relatively poorer compared with the rest of the community over time.
"It has had a large impact on real value," says Matthew Linden, from Industry Super Australia. Instead of increasing over time due to inflation and productivity, the age pension increases only with inflation. There is also potential for indexation to lag behind increases in pensioner-specific living costs.
As well, the government raised the age pension age to 67 for people born on or after January 1, 1957. For anyone born on or after July 1, 1952 the age increases to 65.5 years.
The government tightened the assets test from January 2017 and moved the goal posts for older Australians, says Linden. These severe changes have impacted 416,000 age pensioners. Around 91,000 lost their age pension altogether and a further 235,000 have seen their part age pension reduced.
With so many changes, David Knox, senior partner and actuary at Mercer Australia, says retirees want certainty and need to know the means test won't change. "We need a statement and commitment from both political parties that it won't be changed."
Andrew Boal, Rice Warner's chief executive and chair of the Actuaries Institute's retirement strategy group, says Australia is one of the few countries that has a means-tested age pension. The taper rate works to "target the people who need [financial help] the most".
Both Knox and Boal believe the taper rate is too punitive and would like it to be more generous, as it encourages retirees to spend their savings quickly and risk living on the age pension.
Boal believes the age pension will always be around because the Australian economy can afford it. "The cost of the age pension is around 2.5% of GDP and is projected to be the same going forward. So it is very manageable."
Some countries with a burgeoning ageing population spend much more. Italy and Greece, for example, spend 15% on the age pension.
"I've never felt that the age pension is broken. You should have great certainty that it is affordable," says Boal.
Knox agrees: "We will always have an age pension."
Discounts are an extra benefit
The full age pension sits at around 28% of average weekly earnings and on its own just about satisfies the Association of Superannuation Funds of Australia standard for a "modest" lifestyle in retirement.
Of the 63% of retirees who receive the age pension, 39% get the full amount while 24% receive a part payment. But will the changes to the taper rate shift this balance?
There are some important exemptions to the age pension assets test, such as the family home. It isn't counted and pensioner couples owning a home are allowed to hold up to $880,500 in assets before their eligibility cuts out.
One of the benefits of obtaining a part age pension is being eligible for discounts on health care, transport and utilities.
The pensioner concession card provides a range of handy discounts depending on the state you live in and your needs.
As a rule it provides the most benefits of the three Centrelink cards available. For example, in NSW the pensioner card entitles you to discounts on council rates, water, energy and gas bills, plus registration and driver's licences - a saving of around $1772pa.
The Commonwealth Seniors Health Card entitles the holder to cheaper prescriptions and medical appointments.
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