When Charles Dickens penned the phrase "It was the best of times, it was the worst of times", he could easily have been writing about retirement. While the stress of the daily nine-to-five grind may be gone, so too is the weekly pay cheque. And with average life expectancy increasing, financial planners say work stress is replaced by "long-life" stress.
"People are living longer after retirement than they did 20 years ago, and that means they have to finance that life and lifestyle they want," says Michelle Tate-Lovery, principal of Unified Financial Services.
She says planning at least two years ahead can make the difference between a comfortable retirement and one dominated by financial struggles.
"People should get into the habit of seeing a financial adviser to assess their current situation so they know how much they are going to be retiring on. Six months is too short - there is very little they can do in that time to reach their target," she says.
For many people, a big part of that planning is figuring out what government benefits they are entitled to claim and how to ensure they qualify.
Stephen Poucher, financial planner with Lowell Flinders Group, says, "for Centrelink purposes you are allowed to have assets up to a certain amount and every dollar over that amount you lose entitlement to the pension until it cuts out completely; the same applies to income".
Centrelink's Financial Information Services will advise people about what they can claim.
"People often rule themselves out of entitlements, without first speaking to Centrelink," says Centrelink's national manager, Hank Jongen.
"For example, many self-funded retirees can access the Commonwealth Seniors Health Card, which makes a huge difference in the cost of medicines.
"Many simply aren't aware of the range of payments and services Centrelink offers."
The age pension
Men qualify for the pension once they turn 65, while for women it ranges from 60 to 65, depending on year of birth. To receive the full pension, your income must be less than $116 a fortnight, if single, or $204 for a couple.
Assets are also tested. Single home-owners can own up to $145,250 in assets and still receive the full pension; couples can have up to $206,500. Non-home owners can have up to $249,750 in assets (for singles) and $311,000 (for couples) and still receive the full pension.
There are ways to reduce your taxable income and/or assets to maximise your pension entitlements.
You should consult a certified financial planner, who is also a member of the Financial Planning Association, before you consider such strategies, which include buying allocated pensions or allocated annuities, lifetime or complying pensions, gifting and the purchase of a funeral bond.
Allocated pensions and allocated annuities
An allocated pension is an individual account that is set up through a super fund, with the underlying money invested in a diverse portfolio. Depending on the level of risk you accept, the investments can be spread across Australian and international shares, property, cash and fixed-interest. This allows the "pensioner" to draw down on the account regularly for an effective and legal way to ensure a steady tax-free income stream while still qualifying for the pension. An allocated annuity differs only in that it is an annuity contract issued by a life insurance company.
The more of your own after-tax money - be it funds lying in an account or the proceeds from the sale of the family home - you put into super throughout your working life, the more tax effective your income stream in retirement, says Ms Tate-Lovery.
Such additional funds are known as undeducted contributions and do not attract tax on the way in. Nor does this component of your regular income stream attract tax once you retire.
"Upon setting up an allocated pension, the more of your own undeducted contributions you put in, the more tax-effective it will be as an income stream on retirement," Ms Tate-Lovery says. "This is because it has the effect of increasing your tax-free income threshold."
The amount you can draw down each year is based on life-expectancy tables and the amount you have in the account.
CPA Australia financial planning adviser Carolyn Mooney says annual income from an allocated pension account can be changed from year to year, as long as it remains within the minimum and maximum limits.
"Each year the minimum and maximum limits must be calculated by dividing the balance of your individual account by the age-based pension factor," she says.
For example, Ms Mooney says, Georgia, aged 65 has an account balance of $200,000. The maximum pension factor at 65 is 8.1 and the minimum is 15.7. Therefore, the maximum payment she can withdraw this year is $24,691 ($200,000 divided by 8.1) and the minimum is $12,738 ($200,000 divided by 15.7).
Lifetime pension and complying pensions
If you have too many assets, life pensions can be used to legally shelter them, meaning Centrelink will not take them into account when determining your pension entitlements.
"People with a certain amount of assets who are just outside of eligibility for a Centrelink pension can reduce their assets (with a) complying or life-time pension," Mr Poucher says.
The difference between lifetime and complying pensions is the time frame. Also with a complying pension you receive the remaining capital, or asset, at the end of the contract.
Like an allocated pension, lifetime and complying pensions give you a regular income stream for the life of the arrangement. You may want to set up the income so that it increases annually in line with inflation.
Gifting
It's all about the amount of capital you have, says Mr Poucher, and gifting allows you to reduce that and reward your family and friends, or perhaps a charity. However, if you give away too much, the government will refuse to recognise it and factor both the cash and what it would have earned when assessing your assets and income.
"Centrelink says if you give your children, say $50,000, you have effectively deprived yourself of the earning power of that money, so they count $40,000 as an asset in your hands for the next five years and will deem a certain amount of income from it, which will affect your pension," Mr Poucher says.
Previously pensioners were allowed to give away up to $10,000 a year but this has now been reduced to $30,000 over five years.
Funeral bonds
One way to reduce your assets without gifting is to buy a funeral bond to the value of $5000, which is used to pay for your funeral.
Generally, the bonds are offered by friendly societies and, as they are payable only on death, are not regarded as income-generating and do not attract the attention of the tax man.
However, changes are afoot. The Federal Government is considering new legislation that will change the tax treatment of such bonds that may be backdated to those bought on or after January 1, 2003, making them subject to a
30 per cent tax on earnings on the underlying investments of the bonds.
However, when the bond-holder dies and the funds are transferred to the estate, that rate may effectively be reduced to the marginal tax rate of the entire estate by the use of franking credits.
One other method to reduce your assets is by spending money on the family home. While a renovation will increase the value of the home, when it is sold it does not attract capital gains tax. While there is no limit to the amount of money you can pour into the house, be careful not to overcapitalise.
Pension bonus scheme
This scheme is designed to encourage people to continue working (either full-time or part-time) after reaching retirement age. The bonus is a one-off, tax-free, lump sum paid when a person stops working and claims an age pension.
But don't wait until you stop working to see if you qualify; you should register for the scheme with Centrelink as soon as you pass
retirement age.
The amount you receive varies according to how long you have deferred receiving the pension and what pension rate you are eligible for. For example, a single person who deferred for one year and is entitled to a full pension will receive about $1040, while a person who deferred for five years will receive about $26,240.
Pension loan scheme
For those who qualify for only a part-pension, or none at all because their income or assets are too high (but not both), the government provides a loan scheme.
The scheme allows you to receive an income up to the amount of the full pension, including the pharmaceutical allowance and, if eligible, rent assistance.
However, rules apply: you must own property in Australia that can be used as security. You will also be charged compound interest on the loan.
If you want to set aside part of the value of the property so you can move into a retirement home in later life, you can nominate a guaranteed amount for that purpose.
For example, the property is valued at $210,000 and you want to set aside $85,000; your eligibility for payments under the scheme is based on $125,000, the value of the property less the guaranteed amount.
Concessions
There are a range of concession cards and allowances that can reduce your living expenses.
The Commonwealth Seniors Health Card, for example, is given to everyone of pension age whose annual assessable income is below $50,000 if single and $80,000 for a couple.
After 52 prescriptions, all Pharmaceutical Benefit Scheme medication is free for the rest of the year.
On top of your concession card, you can automatically get extra money with your pension, to help pay for prescription medicine. This is called the Pharmaceutical Allowance.
Centrelink can also help with your telephone bill if you have the Seniors Health Card. Those who are eligible receive $18.60 every three months for singles and $9.30 for each eligible member of a couple. The payment is indexed.
Other benefits include rail-ticket concessions on the Indian Pacific, the Ghan and Overland.
Mr Poucher says one reason people want to meet the eligibility test for the age pension is because of the Seniors Card, which can save a pensioner "a couple of thousand dollars every year". Still, "sometimes they are better off not being eligible as they will receive more income for their existing assets," he says. He recommends that you consult your financial adviser to determine the income generated by a well-structured investment portfolio versus the benefits of being a card holder.
The Federal Government also issues a Pensioner Concession Card to every pensioner. One of the benefits is free hearing aids. The card also provides discounts on state and local government charges such as fares on public transport, dental care, 17 per cent off gas and electricity bills, $140 off car registration, half the TAC fee for car insurance, free emergency ambulance service and reduced council rates, including water and sewerage.
Help with your rent
Some pensioners are entitled to rent assistance depending on the amount and type of
rent they pay.
Senior Tax Offset
The Senior Australians Tax Offset, formerly known as the Pensioner Rebate, allows people who have reached retirement age to earn more income before they have to pay tax and the Medicare levy, regardless of whether they claim the pension.
Jennifer Brookhouse, RetireInvest's technical manager, says the old Pensioner Rebate was widened to include everyone of retirement age as part of the Federal Government's push for people to fund their own retirement rather than draw on the public purse.
Under the system, a person whose taxable income is $20,000 or less is eligible for a maximum tax rebate of $2230.
When it is combined with the standard low-income earner rebate of $150, the person ends up paying no tax.
Reasonable Benefit Limit
The Reasonable Benefit Limit is the maximum amount of retirement benefit a person can receive over a lifetime at a concession tax rate of 15 per cent.
The government has set two limits, again to encourage people to fund their own retirement.
If you take a lump sum from super, any amount over $562,195 will be taxed at your marginal rate.
However, if you take the money as part of an income stream from an allocated or lifetime pension, the limit is $1,124,384 before you enter the higher tax bracket.
