On Tuesday 12 May 2015 the Federal Treasurer, Joe Hockey delivered his second budget, describing it as ’measured, fair and responsible’ and one designed to promote ’jobs, growth and opportunity’.
For Australian retirees, the Budget contained a number of important proposals, including:
- increases in the Assets Test thresholds and the Assets Test taper rate
- abandoning changes to the indexation of the Age Pension and the deeming and Income Test thresholds
- removal of the former home rental income exemption for aged care residents
- a higher Medicare levy low income threshold.
The bill containing changes to the Centrelink pension assets test thresholds and tapering rates announced in the May 2015 federal budget has now passed. The bill also contained other measures which were removed and the Government has advised that these will subsequently be reintroduced to parliament in new bills.
In addition, a separate bill was passed to remove the senior’s supplement that holders of a Commonwealth Seniors Health Card (CSHC) receive on a quarterly basis.
Outlined below is a summary of the relevant changes.
Broadly, the key changes are as follows:
Increase of the Assets Test thresholds
The Assets Test threshold describes the level of assets a retiree can have, on top of their family home, before their Age Pension entitlement is reduced under the Assets Test. The current and proposed thresholds are detailed below.
|Assets Test threshold for full Age Pension|
|Currently||From 1st Jan 2017||Increase|
|Couple, homeowner (combined)||$286,500||$375,000||$88,500|
|Couple, non-homeowner (combined)||$433,000||$575,000||$142,000|
Increase the Assets Test taper rate from $1.50 to $3.00
The Assets Test taper rate is used to determine a retiree’s Age Pension entitlement under the Assets Test. Currently a person’s Age Pension entitlement under the Assets Test is reduced by $1.50 for every $1,000 of assets above the Assets Test threshold (which is being increased as described previously). The proposed measure will increase the taper rate to $3, effectively reducing the amount of assets a person can have before they are no longer entitled to a part Age Pension entitlement. A person is no longer entitled to a part Age Pension when their assets exceed the levels set out below.
|Currently||From 1st Jan 2017||Decrease|
Importantly, clients who have their payment reduced to nil on 1 January 2017 as a result of this measure will automatically be issued with either a CSHC or a Low Income Health Card without needing to meet the usual income test requirements.
Removal of seniors supplement
Currently, holders of the CSHC receive a quarterly allowance in the form of a seniors supplement. This supplement is $894.40 per annum for singles and $1,346.80 per annum for couples combined. The quarterly payment on 20 June 2015 was the final seniors supplement payment to cardholders
A bit of History
Australia has one of the most generous welfare systems. Under current rules, a couple can have up to $1,151,500 of assets, plus a family home of unlimited value, before losing access to at least a part pension. The cut-off point for the income test is $74,818 a year. At these levels the pension paid is miniscule, but the true value is the ability to get a pensioner health card, which is available to anyone who is receiving a part age pension.
The current system of payment rates came about during the Howard era almost a decade ago, when the budget was in a surplus of $17.2 billion. The previous reduction rate of $3 for every $1,000 in assessable assets over the threshold was halved to $1.50. It was created as an incentive for retirees to keep working and saving for their retirement, and therefore, receive a bigger part Age Pension once in retirement. However, now that we have a deficit it is widely considered that it’s just unsustainable.
Social Services Minister Scott Morrison has stated that “At the end of the day, the welfare system is there for people most in need. It’s there as a safety net, it’s not there as an incentive system.”
Currently the welfare system costs Australia $42 billion a year and it is growing at over 6 per cent a year and without change will have risen to over $60 billion in the next 10 years.
What does this mean to me?
If Leanne had her way, she would have much preferred the Liberal Governments original proposal of freezing the indexation of the Age Pension and the deeming and Income Test thresholds. This would have meant that as the assets and Income grew for those receiving Centrelink Support that they would have received less Centrelink Support. This was definitely a softer approach but it didn’t give an increase to Centrelink Support for people with lower assets and income so the Liberal Government couldn’t get it though.
The rules that will commence on the 1 January 2017 were supported by the Greens and will increase some receivers of Centrelink Support by up to $4,836 per year and reduce others by up to $14,468 per year.
To see where you fit in, visit our Website page.
As you know when preparing your financial plan we have always used very conservative forecasts so for those that are sticking to the budget you set for yourselves and using the Macquarie Cash flow system most of you will not have to make any significant changes as a result of this. If you are one of the few that will need to make changes we will help you to determine your best option including whether Challengers Liquid Lifetime Annuity that provides favourable income and asset test treatment is suited to you.
As always, please do not make any significant change like buying a lifestyle asset or changing homes without first checking with us what effect the change will make to your plan based on the new rules.