How do I do that?
As part of its super reforms, the Government has said it will
close off the present 50 per cent assets test exemption for certain
types of retirement pension products from September 20 next year.
Pensions purchased before this date will still get concessional
treatment but any new pensions will be fully taken into account for
the assets test. This means people retiring in the next year have a
limited period in which they can lock in an age pensions
entitlement - or an entitlement to a higher pension - before the
rules change. In some cases it may be worth bringing forward
retirement - though David Giltrap, Deutsche Asset Management's
technical adviser, warns the changes have not yet been legislated
and it may be better to defer making that final commitment until
they are.
What sort of pensions get the concession?
The concession is available to "complying income streams" -
products that provide you with a long-term income. The main
products are complying pensions, which give you a set income, and
term allocated pensions, where your income each year depends on
your account balance. The big drawback is that, unlike the more
popular allocated pensions, both products are non-commutable -
which means you can't cash them in early. Giltrap says you need to
weigh up this negative against the prospect of more income.
But isn't the Government making the assets test more
generous anyway?
It is. From the same date it is reducing the pension taper rate
(the rate at which your pension is reduced under the assets test)
from $3 of pension for every $1000 of assets above the minimum
limit to $1.50. That means you'll be eligible for a part pension
even if you have assets worth up to about $500,000 for individuals
or $800,000 for couples. This means more people will be eligible
for a part pension regardless of whether they use a complying
income stream. However, Giltrap says, the new taper rate will
provide a kicker to people who use these products.
How does that work?
He uses the example of John and Joan, who have $500,000 of
assets (outside their home) as they reach pension age. The bulk of
this - $450,000 - is John's super. If they didn't use a complying
income stream, Giltrap says they could generate an income of
$27,114 under the present rules. This would include a part age
pension of $1102 a year. When the new taper rate comes in, their
age pension entitlement will automatically increase to $11,671 a
year (based on the present age pension rates), lifting their income
to $37,683 a year.
If they put $300,000 of John's super into a term-allocated
pension, Giltrap says the couple could increase their income to
$39,477 a year - thanks mostly to an age pension entitlement of
$12,802. But when the new taper rate comes in they'd be eligible
for even more age pension - $17,521 a year, which would lift their
total income to $44,396.
So using the term-allocated pension would boost their annual
income by almost $7000 a year once the new taper rates come into
effect.
Giltrap says John and Joan could generate an even higher income
- $47,752 under the new taper rate - by investing all John's super
in a term-allocated pension. While many people have been reluctant
to tie all their super up in non-commutable pensions, Giltrap says
the development of reverse mortgages and other equity release
products has made this more attractive. Provided you're comfortable
with these products, he says, you could put your capital into a
term-allocated pension to maximise your income and draw on your
home equity if you find you suddenly need extra capital.
Is there any chance the Government will make complying
income streams more flexible under the new super
rules?
It has said these products will continue to be non-commutable.
So probably not. Giltrap says once the Centrelink exemption is
abolished, retirees will have no reason to use these products,
leaving them as a "legacy product" for people who have already
locked in to gain the Centrelink (and old reasonable benefit limit)
concessions.
