age-pension

How the upcoming retirement benefit reforms might affect you

From the Age Pension to your super fund, here is what the new year will bring.

For the majority of Australians, superannuation is one of our most important assets. As soon as we land our first “adult job” we begin to contribute to our super and start building our retirement fund. Australians are also fortunate enough to have a comprehensive and generous Age Pension system, which has an important impact on the quality of life of retirees.

However, under the current Coalition Government, superannuation laws and the Age Pension are going to be dramatically reformed. The idea behind the changes is to shift some of the support provided to wealthier Australians to further assist those with lesser assets. These reforms are expected to come into effect in 2017 and with the new year just around the corner, you need to understand how they might affect you.

Wind back of superannuation breaks

Studies have illustrated that it is counterintuitive to offer super tax breaks to high income owners who are likely to be well-off in retirement. Accordingly, the new superannuation reform will cut back on the tax breaks offered to the top 20% of income earners. As well as this, the current superannuation contribution rate of 9.5% is due to increase to 10% from 1 July 2021 and further increase to 12% by 1 July 2025.

It is estimated that these changes will affect only 4% of Australians (550,000 people) holding superannuation accounts. However, the Association of Superannuation Funds of Australia argues that this figure has been underestimated and suggests that 9% of Australians (1,250,000 people) will be affected instead.

Retirees currently have the benefit of tax-free superannuation earnings, but under the new bill, tax-free earnings will be capped at $1.6 million. Likewise, the current $180,000 per annum cap on super contributions will be adjusted to a lifetime cap of $500,000. However, on the flip side, the bill will enable people above the age of 56 to have early access to a portion of their superannuation.

Proposed changes to superannuation legislation passed Parliament in November. Read more in our detailed walkthrough of how superannuation changes could affect you.

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Age Pension: winners vs losers

It is imperative that all Australians understand the implications of the upcoming Age Pension reforms. Darren James, AMP’s financial adviser, warns that while these changes have received significantly less media coverage than the superannuation reforms, they should not be overlooked.

Current forecasts suggest that more than 300,000 pensioners will have their pensions cut and 100,000 of these will lose their pensions altogether. However, Centrelink states that these figures might actually be even higher. On the other hand, it is also estimated that over 50,000 Australians will be entitled to the full Age Pension.

The reforms will bring about new asset test thresholds. If you are receiving an Age Pension, you might find your pension reduced, especially if you are receiving a partial pension. The new asset test threshold means that if you and your partner own between $450,000 and $823,000 in assets, excluding the worth of your family home, you can expect to have your pension cut. Under the new taper rate, your pension will be reduced by $3 per fortnight for every $1,000 you hold in assets above the lower threshold. More alarmingly, if you own more than the cap of $823,000, you will no longer receive the Age Pension. Currently, the cap is at a much higher $1,178,500.

Single homeowners can expect a cut if they own assets with a total value of between $250,000 and $547,000, and will no longer receive a pension if they own more than $547,000.

If you do not own your home, then higher thresholds will apply to you. Read more in our comprehensive guide to the current pension eligibility requirements.

Compensation for those losing out

If you find yourself with a reduced pension, the good news is that you will at least be “compensated” with a Commonwealth health card for seniors and/or its low income counterpart. These cards will provide you with Medicare bulk billing and discounted pharmaceuticals. Admittedly, these cards will be an inadequate compensation to having your pension cut.

How you can prepare for these changes

You can adopt numerous strategies to take advantage of, or at least mitigate, the impact of these inevitable challenges of 2017. Darren James points out that your strategy should revolve around your family home, as it is excluded from the new asset testing. Specifically, it would be wise to add further value to your home before the changes come into effect, with either a complete overhaul, renovations to the living room, or any other refurbishments that you see fit.

Likewise, you might also want to decrease your assessable assets. You can consult your financial planner or accountant about strategies such as gifting to family members, an intriguing accounting concept known as “prepaying for funerals”, or even moving your savings into your partner’s superannuation.

Rates last updated November 24th, 2017
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Nonetheless, you should keep an eye on your spendings and don’t treat this as an excuse to blow cash on anything unnecessary. All in all, slim down your assessable assets but don’t waste any of your hard earned savings.

Aside from your super fund and the Age Pension, Aussie retirees also receive many other benefits.

Wilson Zhang

Wilson Zhang is a contributor for finder.com.au. He specialises in investments and robo-advice. He loves these because he believes these to be the way of the future! Wilson has also been an expert in overcooking instant noodles for the past 15 years.

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