Money Matters

Changes for Pensioner Income and Assets Test Means

The announcement of a reduction in the deeming rate that is applied to certain investments, may also give a small lift in pension for those not on a full pension due to the income test assessment, however it is the change in assessment for annuities from July 1st that offers the bigger boost for pensioners. 

What does it mean? 

Under the income test only 60 per cent of payments from a post July 1st,  pooled lifetime income stream will count as income.

This reflects that part of the payments made are a return of the annuitant’s capital and therefore not income.

Under the assets test, sixty per cent of the purchase amount will be assessed at the point of purchase. This will continue until the person reaches their “threshold day”, after which 30 per cent of the purchase amount will be assessed.

Threshold day is calculated with reference to the life expectancy of a 65-year old male on the assessment day, according to the Australian Government Actuary Life Tables (currently age 84). The threshold day is no less than five years after assessment day.

In other words, at age 84 or after 5 years for someone commencing an annuity who is more than 79 years of age, a further reduction in assessment income and assets applies where only 30% of the original purchase amount is counted. 

This can make a massive difference to not only the age pension but also the aged care means tested fees and costs. 

Opportunity and benefits?

Take the example of a 70 year old who takes up a $100,000 life-time annuity with a 15 year guarantee period, who has a 67 year old wife that is attached to the annuity as a reversionary beneficiary.

The income paid by the annuity is quoted at $4,498 per annum but the side benefit is the kick in age pension.

Only $60,000 of the $100,000 counts as an asset which boosts their age pension by $120  per fortnight.

The income test component is 60% of the $4,498 which is $2,699.

That income test outcome is less than what the deemed rate would be if retained in a bank account or similar investment.

At age 84, the assessed asset value drops to $30,000 which further boosts the age pension by $90 per fortnight under the assets test.

Because CPI index option was taken, the annuity pays an estimated $6,063 pa at age 84 however, including the age pension boost due to asset reduction, results in an equivalent of 11.46%pa return on the initial $100,000.

The reversion option means that the annuity continues to be paid indexed to CPI until the death of both of the couple but the 15 year guarantee period enables the residual capital to be paid to the estate, should both be deceased within that period. 

People living to 100 or well into their 90s is common now days, so the security of guaranteed income is likely to feature more prominently in retirement planning. 

This information is of a general nature only, and does not take into account a persons individual circumstances, so seeking individual advice is recommended to determine appropriateness. 

Alan Tickle and Your Heritage Financial Planning Pty Ltd. are authorised representatives of Alliance Wealth.

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