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What will you do when the pension drops in 2017?

What will you do when the pension drops in 2017?

Currently, if a Pensioners assets exceed a certain threshold, the amount of pension received is reduced from the maximum pension, by $1.50pf, for every $1,000, that their assets exceed that threshold (known as “the taper”).

In January 2017 the taper will increase to $3.00pf, per thousand dollars that the assets exceed the threshold, & therefore many people will see their Age or Disability Pension reduced or lost totally.  The outcome of the change to the taper is that it effectively reduces the assets threshold at which point the pension cuts out (even though the threshold where the pension starts to reduce has increased), more pensioners will get less pension.

Combine this with the prevailing low interest rates, it all adds up to pensioners seeing their incomes eroded, yet living costs continue to increase, making it harder & harder to to live comfortably.

WHAT CAN YOU DO ABOUT IT?

  1. Find out whether you will be affected by these changes

  2. Determine whether you are receiving the correct amount of pension now (30% of people we see, are getting less pension than they should)

  3. Determine whether there are any structural or strategic changes you can make that will increase your pension entitlement.

  4. If you are going to get less pension (or lose it) when these changes come into effect, then you could consider alternative investments that deliver higher yields (ie pay more income), without taking high risks. Eg having some of your investments exposed to the property market (or other growth markets) can deliver income of 6-7%pa (compared to bank accounts at 2.5%pa). This doesn’t mean that you should put all your money into these types of investments, but a small percentage of your funds could make a big difference (see examples later in the newsletter).

  5. If you are going to be affected by these changes in 2017, don’t wait till then to see the impact on your cashflow, prepare yourself ahead of time, & make the necessary changes now.

Our Financial Advise Michael Levene is available to help you determine if you will be affected by the changes, to find out, call him on 8814-7307.

 

Example

Shirley (86) widow

Owns her home & has $400,000 in the bank, which she & her late husband worked very hard to accumulate, so that they could be comfortable in their retirement. The recent falls in interest rates has seen her interest income fall from $22,000pa, 3 years ago to $10,000pa now (a 54% fall in income).

Currently Shirley Age pension is $562pf ($14,360pa) ie

Centrelink Pension ($562.70pf)

$14,630pa

Interest on $400,000 @ 2.5%pa

$10,000pa

Total income

$24,630pa

NB 3 years ago Shirley’s total income was $36,360pa

When the Change to the “taper” is introduced in January 2017, Shirley’s pension & total incme will look like this;

Centrelink Pension ($402.20pf)

$10,457pa

Interest on $400,000 @ 2.5%pa

$10,000pa

Total income

$20,457pa

Ie Shirley will lose $3,903pa ($75pw) & be earning just over 50% of what she was earning 3 years ago, but the Cost of living has not dropped.

Shirley would need to earn an extra 1% income from her investments to be where she is today.

 

If Shirley was to consider investing 25% (ie one quarter of her total investments) into higher yielding investments that delivered an average income of say 7%pa, then;

$300,000 in Term Dep. @ 2.5%

$7,500pa

 

$100,000 @ 7%pa

$7,000pa

 

Total Income

$14,500pa

Still a conservative investor

 

Centrelink Pension ($402.20pf)

$10,457pa

Interest on $300,000 @ 2.5%pa

$7,500pa

Income on alternative investments $100,000 @ 7%

$7,000pa

Total income

$24,957pa

Shirley has therefore maintained her income without taking high risk.

 

Current Asset Test Pension Thresholds

 

Full Pension- pension starts to reduce when assets exceed these limits

No Pensioncuts out when assets exceed these limits

Single- Home owner

$202,000

$764,000

Single Non- Home owner

$348,000

$910,500

Couple-Homeowner

$286,500

$1,134,000

Couple -Non Homeowner

$433,000

$1,280,500

 

Amended Asset Test Thresholds to apply in January 2017

 

Full Pension- pension starts to reduce when assets exceed these limits

No Pension cuts out when assets exceed these limits

Single- Home owner

$250,000

$547,000

Single Non- Home owner

$450,000

$747,000

Couple-Homeowner

$375,000

$823,000

Couple -Non Homeowner

$575,000

$1,023,000

Posted: 20-Sep-2015. Author: Michael Levine

 

 
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