The age pen­sion – is it un­der threat?

Money Magazine Australia - - COVER STORY - SU­SAN HELY

Fi­nan­cial plan­ners some­times warn their clients that the age pen­sion is vul­ner­a­ble to po­lit­i­cal risk. This means that the fed­eral govern­ment may tin­ker with it fur­ther, mak­ing it harder to rely on it for re­tire­ment plans.

“With the strike of a pen, there’s a risk that the age pen­sion could not be there in some shape or form. It’s cer­tainly not go­ing to be eas­ier for peo­ple to get the age pen­sion,” says Dar­ren James, fi­nan­cial plan­ner with MBA Fi­nan­cial Strate­gists.

Plan­ners such as James have a point. The govern­ment keeps chang­ing the rules, ar­gu­ing that an age­ing pop­u­la­tion is putting pres­sure on the bud­get. First it raised the pen­sion age to 67 for peo­ple born on or af­ter Jan­uary 1, 1957. For any­one born on or af­ter July 1, 1952, it is now 65½ years.

Then the govern­ment tight­ened the as­sets test from Jan­uary 2017. Th­ese changes have af­fected more than 400,000 peo­ple. Around 91,000 have lost their pen­sion al­to­gether and a fur­ther 235,000 have seen their part pen­sion re­duced. On the up­side, 171,000 are ex­pected to be bet­ter off, with around 50,000 who pre­vi­ously re­ceived a part pay­ment now el­i­gi­ble for a full pen­sion. A fur­ther 120,000 on a part pen­sion are ex­pected to have their pay­ment in­creased by $30 a fort­night.

How­ever, the govern­ment as­sures us that the age pen­sion will al­ways be avail­able.

Ross Clare, di­rec­tor of re­search at the As­so­ci­a­tion of Su­per­an­nu­a­tion Funds of Aus­tralia (ASFA), who wrote a re­port on The Age Pen­sion, Su­per­an­nu­a­tion and Aus­tralian Re­tire­ment In­comes, ar­gues that the cur­rent age pen­sion sys­tem will re­main af­ford­able well into the fu­ture. He says that while fi­nan­cial plan­ners try to scare peo­ple about the age pen­sion, it will al­ways be around be­cause it is af­ford­able for the Aus­tralian econ­omy. “The Aus­tralian govern­ment spends un­der 3% of GDP on the age pen­sion. It is more af­ford­able for the govern­ment in Aus­tralia than just about any other coun­try.”

The full age pen­sion is around 28% of av­er­age weekly earn­ings and on its own just about sat­is­fies the ASFA stan­dard for a “mod­est” lifestyle in re­tire­ment. That ex­cludes hol­i­days, eat­ing out, bot­tled wine, paid leisure ac­tiv­i­ties and home re­pairs.

Of the 80% of re­tirees who re­ceive the age pen­sion, two-thirds get the full amount while a third re­ceive a part pay­ment. Govern­ment pro­jec­tions sug­gest that un­der cur­rent rules by 2050 75% will re­ceive the age pen­sion, with a third qual­i­fy­ing for the full rate and two-thirds on a part pen­sion.

James says that even though the as­sets test was re­cently tight­ened, eli­gi­bil­ity is still gen­er­ous. For ex­am­ple, the home isn’t counted and pen­sioner cou­ples own­ing a home are al­lowed to hold more than $800,000 in as­sets. “Also you can earn quite a lot of money be­fore the age pen­sion is cut off,” he says.

A bonus in qual­i­fy­ing for a part pen­sion is the pen­sioner con­ces­sion card, which pro­vides a range of dis­counts that can be worth, de­pend­ing on your needs, around $5000 to $6000 a year. It gives pen­sion­ers ac­cess to cheaper phar­ma­ceu­ti­cals as well as ben­e­fits of­fered by state gov­ern­ments on prop­erty and wa­ter rates, en­ergy bills, car reg­is­tra­tion and pub­lic trans­port.

In the GFC, self-funded re­tirees be­came el­i­gi­ble for the age pen­sion be­cause share­mar­kets halved, slash­ing the value of their as­sets. This is a good ex­am­ple of how the pen­sion pro­vides in­sur­ance against in­vest­ment or mar­ket risk. It also pro­tects against in­fla­tion risk and longevity risk.

“We have clients with mod­est su­per of $400,000 to $600,000 and they have a small mort­gage. The ASFA num­bers are just a guide. It all de­pends on what the com­fort­able lifestyle means for our clients and how they adapt. In most cir­cum­stances they can get by quite com­fort­ably un­less they have an os­ten­ta­tious lifestyle.”

Once you de­cide how much money you will need to sup­port your lifestyle in re­tire­ment, you can work out how much you need to save and how to go about it.

The first thing to do is make sure you have your as­sets in the right place.

Petersen says pre-re­tirees need to think of all the tools they have. “Be mind­ful of the mix be­tween your su­per and the age pen­sion. It is quite valu­able. Use your house in your re­tire­ment and even con­sider re­verse mort­gages later in life.”

Be con­scious that if you have an as­set such as a house, you can use it later in life with a Cen­tre­link re­verse mort­gage or a com­mer­cially avail­able re­verse mort­gage. It is quite a pow­er­ful tool as long as it is used wisely.

Tra­di­tion­ally peo­ple don’t like run­ning up neg­a­tive eq­uity in their home by tak­ing out a re­verse mort­gage. But Greatrex says it makes a lot of sense.

“Peo­ple want flex­i­bil­ity, they want to travel. They want to com­bine it with jobs that work around that. We want to avoid a so­ci­ety where peo­ple work un­til they are 70 and then they try and do all their travel in a wheel­chair.”

Greatrex likes the movie The Hol­i­day, where two women – one from Eng­land and the other from the US – swap houses. “It can work for peo­ple,” he says. “Too many peo­ple keep do­ing the same thing. I am al­ways think­ing, what can I do dif­fer­ently and bet­ter?”

Weigh up the costs, ad­van­tages and dis­ad­van­tages of down­siz­ing care­fully. Petersen says peo­ple rarely con­sider the trans­ac­tion costs in­volved with mov­ing house – they can eas­ily add up to $50,000 or more. A lot of sin­gle older women in par­tic­u­lar grow tired of hav­ing to main­tain their big homes and want to move. But of­ten the stamp duty and trans­ac­tion and mov­ing costs can buy an aw­ful lot of main­te­nance.

SALARY SAC­RI­FIC­ING

Greatrex en­cour­ages his clients to salary sac­ri­fice to su­per, par­tic­u­larly with the new, lower con­tri­bu­tion cap of $25,000 a year. He is a big fan of self-em­ployed con­tri­bu­tions and early salary sac­ri­fic­ing.

He says it is more im­por­tant than ever for younger peo­ple – even those with a mort­gage – to con­trib­ute higher amounts to su­per. “It is harder for them to catch up. It’s not go­ing to get any bet­ter. Yes, you will have a big­ger mort­gage for longer but the money will grow in the su­per fund. If you still need to knock out the mort­gage when you re­tire, you will have the money in your su­per to do it.”

Af­ter 40, when the mort­gage is be­ing paid down, HLB Mann Judd’s Ca­puto rec­om­mends salary sac­ri­fic­ing up to the max­i­mum con­ces­sional amounts.

DON’T SPEND YOUR PRE­CIOUS CAP­I­TAL

One of the clever strate­gies is to live on the in­come from your ac­count-based pen­sion rather than draw down the cap­i­tal. When you are over 60, all in­come from an ac­count-based pen­sion (capped at $1.6 mil­lion from July 1) is tax free. If you spend your cap­i­tal you are run­ning down your as­sets and that can com­pro­mise long-term liv­ing stan­dards.

“Peo­ple do get sur­prised to learn that they are in a bet­ter po­si­tion than they thought,” says Sharples-Rush­brooke. “Partly that is be­cause if they take the min­i­mum amount of re­turn from their ac­count-based pen­sion, de­pend­ing on how in­vest­ment mar­kets do – and you have to be care­ful about pro­jec­tions – if you are draw­ing down 5% and your in­vest­ments are earn­ing 5%, then your un­der­ly­ing cap­i­tal isn’t go­ing down.”

“A lot of peo­ple don’t re­alise this. What this means is that they may not need as much as they think they do.”

Clare points out that the ASFA re­tire­ment stan­dard is based on su­per­an­nu­a­tion sav­ings of $640,000 for a cou­ple who own their own home. If re­tirees draw down the min­i­mum amount, money will run out at 92, de­pend­ing on how they in­vest.

IN­VEST IN LONG-TERM GROWTH AS­SETS

An ap­pro­pri­ate in­vest­ment strat­egy and as­set al­lo­ca­tion are cru­cial in your re­tire­ment, as that pro­vides you with in­come. Ca­puto rec­om­mends you have 70% of your ac­count-based pen­sion in growth as­sets. “Tak­ing a long-term view, where your cap­i­tal is not re­quired for at least three years, and an in­vest­ment al­lo­ca­tion favour­ing growth as­sets such as Aus­tralian and in­ter­na­tional shares, it could gen­er­ate an av­er­age an­nual re­turn of 7% be­fore in­fla­tion,” says Ca­puto.

Ca­puto has crunched the num­bers to show the dif­fer­ence be­tween get­ting 7% (5% af­ter in­fla­tion) and 3%:

Jenny has $475,000 in an ac­count-based pen­sion that she com­bines with the age pen­sion. She in­vests in growth as­sets and re­ceives 7%pa over 20 years. She draws down around $23,000pa. At the end of the 20 years, her ac­count-based pen­sion has climbed to $858,000.

In con­trast, Joel has opted for a more con­ser­va­tive in­vest­ment that earns 3%pa. He draws down the same amount as Jenny, $23,000pa, but be­cause of the lower re­turn he has only $255,710 in his ac­count­based pen­sion – $600,000 less than Jenny. The only vari­able is the earn­ings rate.

A re­turn of 3%pa would dras­ti­cally change the 20-year out­look, says Ca­puto. “Th­ese sce­nar­ios demon­strate a se­cure cash-type port­fo­lio, where there is likely min­i­mal cap­i­tal growth. Long-term in­vestors should have an al­lo­ca­tion to eq­uity in­vest­ments in or­der to achieve rea­son­able re­turns, par­tic­u­larly in the cur­rent low­in­ter­est-rate en­vi­ron­ment.” Of course, eq­uity in­vest­ment is not with­out risk but with div­i­dend

yields (in­clud­ing frank­ing) much higher than in­ter­est rates at present there is com­pen­sa­tion for the risks.

Fi­nan­cial plan­ners such as Sharples-Rush­brooke avoid an­nu­ities, which pay a guar­an­teed in­come. “Be­cause the in­vest­ment risk has shifted to the in­sur­ance com­pany, they are pretty con­ser­va­tively in­vested, par­tic­u­larly with cash rates so low at the mo­ment,” she says “They don’t pro­vide the good in­vest­ment re­turn but what they do pro­vide is peace of mind for very ner­vous in­vestors.”

HOW TO QUAL­IFY FOR THE PEN­SION

There are some things that you can po­ten­tially do to struc­ture your as­sets and in­come to get the age pen­sion, says Sharples-Rush­brooke.

If you have too many as­sets and you want to re­ceive the age pen­sion, pos­si­ble strate­gies in­clude:

• Up­grad­ing your home. There’s no need to live in un­com­fort­able or shabby sur­round­ings. “Up­date the bath­room, up­date the kitchen,” says Petersen. “Every dol­lar you spend to get your house up to stand- ard, it will get you closer to the age pen­sion. Ob­vi­ously you have to have the money.”

• Trav­el­ling. If you have al­ways wanted to go on that big world tour, do it. “It is im­por­tant that peo­ple are con­scious of health is­sues later in life and bring for­ward plans like the big trip. Don’t put off your plans be­cause of the cost,” says Petersen.

Giv­ing it away. You are al­lowed to gift $10,000pa or a max­i­mum of $30,000 over five years. If you give away more than $10,000 it is still counted in the age pen­sion as­set test for the five years af­ter it was given away. “Cen­tre­link looks at any­thing in the five-year pe­riod be­fore you re­tire. If you give your child a block of land, for ex­am­ple, the value of that block of land will count to the age pen­sion for five years,” says Sharples-Rush­brooke.

If you gift too many as­sets too soon, you might be in a sit­u­a­tion where you don’t have enough left. “Peo­ple are liv­ing longer and they un­der­es­ti­mate how much they may spend all the time. It is very easy to spend money and it takes much more time to ac­cu­mu­late it,” says Greatrex.

• Buy­ing a fu­neral bond. Money in­vested in burial plots, pre-paid fu­neral plans or fu­neral bonds up to the al­low­able limit of $12,500 (as at July 1, 2016) is not sub­ject to the as­set or in­come test for the age pen­sion. You can in­vest in a bond through an in­vest­ment com­pany, such as a friendly so­ci­ety or life in­sur­ance com­pany, or di­rectly from a fu­neral di­rec­tor.

• Us­ing the age gap. If you are a cou­ple and there is a dif­fer­ence in ages, it is pos­si­ble for the older per­son to re­ceive the age pen­sion while the younger one con­tin­ues in the work­force, since their su­per isn’t counted as an as­set. “The in­come test is a bit more favourable than the as­sets test be­cause you can earn up to $77,000 as a cou­ple be­fore the age pen­sion cuts out, so the younger one can con­tinue to work and the older one can get the age pen­sion,” says Sharples-Rush­brooke.

Un­der the in­come test the fort­nightly age pen­sion ($1339.20 in­clud­ing sup­ple­ments) is re­duced by 50¢ per $1 of in­come above $292 a fort­night. At a com­bined in­come of $2970.40 a fort­night ($77,230pa) there is no en­ti­tle­ment.

For sin­gles, the fort­nightly age pen­sion ($888.30 in­clud­ing sup­ple­ments) is re­duced by 50¢ per $1 of in­come above $164. At an in­come of $1940.60 a fort­night ($50,456pa) there is no en­ti­tle­ment.

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