How the new asset test taper rate works for pensioners
AS foreshadowed in this column last month, the government has announced a change in attitude to wealthy pensioners by changing the asset test taper rate.
For a single homeowner, the base will rise from $202,000 to $250,000 and for a homeowner couple it will rise from $286,500 to $375,000.
The cut-off points will be around $535,000 for single homeowners, and $810,000 for homeowner couples.
This will hit retirees with substantial assets hardest. An age pensioner couple with $750,000 of assessable assets should currently be receiving $602 a fortnight pension. Under the new rules, this would drop by $430 a fortnight, or $11,180 a year.
Don't make the mistake of valuing non-investment assets at replacement value - they should be valued at second hand value. This would put a figure of $5,000 on most people's furniture.
The new taper figures mean that every $10,000 of assessable assets has an effect of $780 a year on the pension.
Overvaluing your car and furniture by $50,000 will cost you $3900 a year in pension, whereas spending $100,000 on travel and house renovations (thus reducing your assets) will increase your pension by $7800 a year indexed for life.
I was discussing the changes on radio recently and a listener pointed out that under the proposed rules, a person with $900,000 in assets would get no pension whatsoever, and if their money was in the bank earning 3%, the income generated would be just $27,000 a year.
They contrasted this with the situation of a full pensioner with minimal assets, who would be getting $34,000 a year indexed.
It's a valid point, but as I said to the listener, the person with $900,000 would be taking a very high risk if they kept their money in cash.
They should have a diversified portfolio, which hopefully should be giving them at least 6%.
One last piece of advice - be wary of spending unnecessary money just to get a higher pension. The fact that the government has been forced to back away from the hard decisions in the Budget is a clear indication that it may be many years before Australia's finances are restored - further cuts to welfare must be expected.
Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: email@example.com.