7 age pension traps to avoid
By Robert Wright /June 03,2022/
After a lifetime of hard work, it’s important you maximise your entitlements in retirement. So you need to structure your finances carefully to make sure you don’t lose your age pension. After all, you’ve earned it. Here are some common traps to be aware of.
Helping loved ones out
It’s only natural to want to help younger family members get a leg up financially. But if you’re nearing or already in retirement, you need to be careful how you go about this, as you could inadvertently affect your age pension entitlements.
If you’re thinking of giving money, the rules are you can gift $10,000 per financial year, and no more than $30,000 over a five-year period.
Any excess amount is counted as an asset, and deemed to earn income, for a full five-year period from the date of the gift.
With house prices so high and home ownership getting out of reach for younger Australians, it’s no surprise that many parents want to help their kids get a foot on the property ladder. But with property you need to be extra careful in how you set things up.
Let’s look at an example. A couple aged 55 want to help their daughter buy her first home. Without taking advice they buy a 50% share of a house worth $500,000 so she can obtain a loan.
Fast forward 12 years and the house is now worth $1,000,000, of which their half share is $500,000. Their other financial assets are worth $700,000 so they believed they would be eligible for a part age pension. To their dismay they discover their equity in their daughter’s home has taken them over the assets test cut-off point, meaning they won’t be getting any age pension from the Government.
So what can they do? If they transfer their ownership share to their daughter the capital gains would be as high as $125,000 after the 50 per cent tax discount, on which capital gains tax could be as much as $50,000. And they would have to wait five years to qualify for the pension because Centrelink would treat the $500,000 as a deprived asset. The total value of the capital gains tax and the lost pension could be as much as $150,000!
If they’d been aware of the trap, or taken advice, they could have gone guarantor for their daughter, possibly putting up their own home as part security, and this would have had no effect on their future pension eligibility. Alternately, they could have transferred their ownership to their daughter at least 5 years before they became eligible for the age pension. They still would have had a capital gains tax liability, but at least the 5-year period for counting the gift would have elapsed by the time they applied for the age pension.
Borrowing against the family home to invest
If you’re already, or about to be, on the age pension, purchasing an investment property with the loan secured against your family home (primary residence) can be a trap.
Normally, the debt against an investment asset—for example, an investment property—is deducted from the asset value when working out whether you’re eligible for an age pension. But if the mortgage is secured against another asset like the family home, then the gross amount is counted. So this may affect your age pension as the full value of the investment is counted as an asset.
A way to avoid this could be to secure the asset against the investment instead.
Downsizing the family home
If you’re thinking of selling your family home and buying a smaller place, there’s an added incentive as the Government is allowing downsizer contributions into super for eligible Australians of up to $300,000.
But there could be a Centrelink sting in the tail, as you’re converting an exempt asset (the family home) into a counted asset (money left over) that could affect your eligibility for the age pension.
Let’s look at an example. Ray (70) and Gina (67) receive close to the full age pension, based on their assets and income.
They want to downsize their family home, which they could sell for $2.5 million. They’d prefer to buy an apartment closer to their kids for around $1.5 million.
If they go ahead, they’d have surplus assets of up to $1 million, which will either considerably reduce their age pension, or cut it off altogether.
By consulting their financial adviser, Ray and Gina could decide either to proceed as planned, or perhaps buy a more expensive replacement property and have less surplus capital, with less of an impact on their age pension.
And their adviser could help to invest the surplus capital to generate an income—for example, by making downsizer contributions into super and starting an account-based pension.
There’s plenty to think about if you’re looking at downsizing, so you might want to get some advice.
Leaving a bequest in your will
Many retired couples leave all their assets to each other in their wills if they pass away.
While this is perfectly understandable, it could cause grief to the surviving partner if their age pension is reduced or lost altogether. The asset cut-off points for singles and couples are quite different—$595,750 for a single person and $901,500 for a couple.
Let’s look at an example. Jack and Jenny have assessable assets of $740,000 and are getting around $11,800 a year in age pension payments. Jack dies suddenly and leaves all his assets to Jenny, taking her over the assets test limit for a single person and she loses the pension entirely.
Unfortunately, Jenny can’t get around this by passing the assets on to their children. If you’re a named as a beneficiary in someone’s will, and you gift it away to, say, your children, it’s still counted as part of your assets and subject to the income test for the next five years.
If Jack and Jenny had consulted a financial adviser, one solution could have been to leave specific assets to their children and bypass the surviving spouse altogether.
Starting a super income stream early
If you start a super income stream once you reach preservation age and before you reach age pension age—for example, as part of a transition to retirement strategy—it could affect your entitlements to Centrelink allowances like Jobseeker. So it’s important to get financial advice.
Advice can make all the difference in how you set up your super and pension arrangements in general. If you have a younger partner, one option could be moving assets into super as a non-concessional contribution for the spouse who is underage pension age.
The amount placed in super for the younger spouse is preserved until they meet a condition of release. This may work well if their condition of release is only a few years away but could be a concern if there’s more of an age gap.
Changing account-based pensions
If you’ve been receiving an account-based pension (ABP) for a while, you should be aware of a change made on 1 January 2015 which impacted how much income from the ABP is counted towards the age pension income test.
If you were in an existing ABP you were exempt from the new rules—but only for as long as you continued with the same provider.
So if you change providers you could inadvertently reduce your age pension entitlements.
A financial adviser can help work out the best option for your particular circumstances—the benefits of a new ABP or the higher age pension.
Setting up a family trust
If there’s a family trust or private company involved in your affairs, the rules are even more complex, so you’ll need expert advice before applying for the age pension.
Downsizer contributions: what are the rules?
By visual /May 13,2020/
In the first year since older Australians have been allowed to make downsizer contributions, 4,246 people have contributed a total of $1 billion in downsizer contributions to their super funds (1 July 2018 – 1 July 2019).
This not only allows retired people to have access to more money to fund their retirement, it’s also likely to have freed up new property for sale for first home buyers and young investors.
Although this is good news for people who have benefited from this scheme, some people have reportedly missed out because they didn’t understand the eligibility criteria.
Here’s a summary of the rules around making downsizer contributions:
- You need to be 65 or over at the time of making the contribution.
- You or your spouse need to have owned your home for more than 10 years prior to the sale.
- You don’t need to be working.
- Both you and your spouse can make a concessional downsizer contribution of $300,000 each if you both lived in the property at some point in time and the proceeds of the sale are exempt or partially exempt from capital gains tax (CGT) under the main residence exemption or because you bought the property before 20 September 1985. If only you lived in the property at some point in time then only you, not your spouse, can make a downsizer contribution (as long as you meet all other conditions).An investment property that you haven’t lived in is not eligible.
- Houseboats, caravans or mobile homes are not eligible.
- The total super balance test of $1.6 million and the $100,000 non-concessional contributions cap restrictions don’t apply.
- You need to make all downsizer contributions within 90 days of receiving the proceeds of sale, usually the date of settlement.
- You can only downsize once.
- You don’t need to buy another property to use the scheme.
If you sell your home and put some of the proceeds into super, you need to consider how this will affect your Centrelink benefits. Your super balance is counted towards the means test so you could potentially lose some, or all, of your Centrelink benefit if your super balance goes up.
Federal Government stimulus package
By visual /March 26,2020/
What it means for individuals, retirees and the Australian economy
Here we explain some of the benefits you may be eligible for.
With the COVID-19 coronavirus crippling the Australian economy and affecting livelihoods, the Australian Federal Government has announced a range of measures to support both businesses and individuals.
The total stimulus announced to date is worth $189 billion, or 10% of the size of the Australian economy, and the government has said more financial support will be announced over the coming months.
For the next six months, the government will establish a new coronavirus supplement worth $550 per fortnight. This will be paid to both existing and new recipients of JobSeeker Payment, Youth Allowance Jobseeker, Parenting Payment, Farm Household Allowance and Special Benefit, doubling the payment for those currently on these benefits to $1,100 per fortnight. Students receiving Youth Allowance, Austudy and Abstudy will also be eligible.
Asset tests and waiting periods that typically apply to these types of payments will be waived, and eligibility will be extended to permanent employees who are temporarily stood down.
Sole traders, the self-employed, casual workers and contract workers whose volume of work has been affected may also be eligible, provided they’re earning less than $1,075 a fortnight. These payments will begin from 27 April 2020.
Household stimulus payments
The government is providing two separate, tax-free $750 payments to social security, veteran and other income-support recipients, including those on the Age Pension, and eligible concession card holders.
The first payment will be made from 31 March 2020 and the second payment from 13 July 2020. However, people eligible for the coronavirus supplement (detailed above) won’t be entitled to the second payment.
It’s expected that up to 6.6 million people will be eligible for the first payment and around five million for the second payment, with around half of these pensioners.
Temporary access to super
The government will allow some people affected by the coronavirus to access up to $10,000 of their super between now and 1 July 2020, and a further $10,000 in the first three months of the 2020-21 financial year, tax free.
Those who are eligible include the unemployed, people receiving JobSeeker Payment, Youth Allowance Jobseeker, Parenting Payment, Farm Household Allowance and Special Benefit. And also people who’ve been made redundant, had their work hours reduced by 20% or more or sole traders whose turnover has reduced by 20% or more since 1 January this year.
Applications can be made online from mid-April by using myGov. Members will self-certify that they satisfy the eligibility criteria.
Support for retirees
To assist those in retirement the government is temporarily reducing minimum super drawdown requirements for account based or allocated pensions, annuities and similar products by 50% for the current financial year and the 2020-21 financial year. This should reduce the need for retirees to sell investment assets in the current soft sharemarket conditions to fund their minimum drawdown requirements.
In addition, the upper and lower social security deeming rates will also be reduced by 0.25% from 1 May in recognition of the impact of persistent low interest rates on retirees’ savings. This comes on top of a 0.5% reduction announced earlier in March.
The government says the change will benefit around 900,000 income support recipients, including around 565,000 people on the Age Pension who will, on average, receive around $105 more from the Age Pension in the first full year that the reduced rates apply.
Minimum payment rates for account-based and allocated income streams
|Age||Current rates||Reduced rates 2019-20 & 2020-21|
|95 or more||14%||7%|
Source: Australian Government’s Economic Response to the Coronavirus: treasury.gov.au/coronavirus
State and territory stimulus
The state and territory governments have also announced economic stimulus packages. The majority of these have so far focused on businesses, however there have been a few measures for individuals, including:
- Western Australia: The WA Government has frozen scheduled increases for household fees and charges, including electricity, water, motor vehicle charges, the emergency services levy and public transport fares, which were previously due to increase by $127 from 1 July. And the Energy Assistance Package, which is available to eligible concession card holders, will be doubled from $300 to $600 from 1 July.
- Tasmania: The Tasmanian Government has announced one-off payments of $250 for individuals (or up to $1,000 for families) who are required to self-isolate. Recipients must hold a Health Care Card, Pensioners Concession Card or be low income earners who can demonstrate a need for financial support, including casual workers.
- Australian Capital Territory: The ACT Government will give rebates of $150 on household rates, as well as freeze a number of fees and charges, including the fire and emergency services levy, public transport, vehicle registration and parking fees. Public housing tenants will receive $250 in rental support, as well as a one-off rebate for residential utility concession holders of $200 to help with power bills.
Due to the uncertainty around the country’s economic position, the Federal Government has also announced that it will postpone the next Federal Budget. The budget is usually handed down in May, but has been postponed until 6 October 2020
Source: AMP March 2020
9 tips for a successful retirement
By Robert Wright /July 01,2019/
Despite the obvious benefits, only 44% of Australians over age 40 feel prepared for retirement. That’s why we’ve pulled together a nine-point retirement planning checklist to help make sure you’re on the front foot when it comes to financial planning for retirement.
1. Do I have to retire by a certain age?
The retirement age in Australia isn’t set in stone. You can retire whenever you want to, but your health, financial situation, employment opportunities, individual preferences, superannuation plans and partner’s needs could play a big part.
2. How much money will I need for retirement and where will I get it?
Saving for retirement can help you prepare financially for the future. Industry figures show that individuals and couples around age 65 who are looking to retire today need an annual budget of $43,317 and $60,977 respectively to fund a comfortable lifestyle (assuming they own their home outright and are in relatively good health).
To live a modest lifestyle in retirement, which is considered better than living on the age pension, an individual would need an annual budget of $27,648, and a couple an annual budget of $39,7753.
These figures are helpful when thinking of retirement planning strategies. Think about how you want to live your life in retirement and add up any potential income sources you may have to support yourself. This could include things such as a superannuation fund, government entitlements, investments, savings or an expected inheritance.
3. What recreational activities are on my to-do list?
When you retire, you’ll likely have more time for the things you enjoy most. Australians are living and remaining active for a lot longer – in your financial planning for retirement, spare a thought for your physical and mental wellbeing, and whether you’ll need a bit of extra money to do the things you enjoy, such as various sports and hobbies, travel and eating out.
4. How and when will I access my super?
Your superannuation plan can make a big difference to your financial planning for retirement, so it’s handy to have an idea of when you can (and will) access your super.
Generally, you can start accessing super when you reach your preservation age, which will be between 55 and 60, depending on when you were born. As for what you do with your super—which from age 60 is typically accessible tax free—you’ll have a few options.
If you want more financial flexibility, you could access a portion of your super balance via a transition to retirement pension (TTR), while continuing to work full-time, part-time or casually.
Alternatively, if you want to retire, you can choose to take your super as a lump sum, or move it into an account-based pension or annuity, if you want a regular income stream. There will be different tax implications for different people, and your super doesn’t guarantee an income for life, so it can be valuable to seek professional advice on superannuation.
5. Will I be eligible for government entitlements?
If you’re thinking about retirement planning in Australia, there are some government payments that you may be eligible for. Along with your savings, government benefits, such as the age pension, Carer’s Allowance and Disability Support Pension, could be an important part of your retirement income.
6. Will I be entering retirement debt-free?
An AMP.NATSEM report found nearly four in five people aged 50 to 65 have household debt. When planning retirement, you may want to consider if you’ll be carrying debt into retirement, and think about ways to reduce it sooner rather than later.
7. Do I have other matters that need addressing?
Insurance – You might have insurance, but it’s worth checking you have the right type and enough of it for your retirement planning. After all, what you require in retirement could be quite different to when you are working.
Investment preferences – Investments are part of many retirement planning strategies, and when you’re retiring, it’s worth reviewing your investment style and the options you’ve chosen. In retirement, you might also consider a more conservative approach, as when you’re younger you generally have more time to ride out market highs and lows.
Estate planning – On top of that, think about your estate planning needs. Have you documented how you want your assets to be distributed after you’re gone and how you want to be looked after if you can’t make decisions later in life?
8. Will I relocate or downsize?
Your living arrangements in retirement should be based on more than just your finances. Your health, partner, family and what activities you decide to pursue once you stop work will all play a part.
If you’re thinking of downsizing to release money from your property, planning ahead can help you feel more in control and provide greater peace of mind as you can assess any out-of-pocket costs in advance.
9. Do I want to make any final super contributions?
The more you can put into super before retiring, the more money you’re likely to have when you retire. And, if you invest some of your before-tax income into super (known as salary sacrifice), these amounts will generally be taxed at 15%, which is lower than the tax most people pay on their employment income. Keep in mind that even if you’re 65 or over, you may still be able to continue to make contributions to your super to fund your future retirement as well.
Source: AMP, June 2019