The age pension has been a hot topic in Canberra in 2015, as politicians debate the best way to ensure the pension system remains sustainable and fair.
In June, changes to the age pension means test were passed by Parliament, to come into effect in 2017. Many pensioners will be unaffected by these changes, some will now get a boost to their pension, and others will receive less or no longer be eligible at all.
“The changes will see what is known as the ‘assets free area’ increased, that is the value of assets you can have in addition to your family home, in order to qualify for a full pension,” the Federal Government’s media release explains. “This will increase from $202,000 to $250,000 for single home owners and from $286,500 to $375,000 for couple home owners.”
At the other end of the asset scale, the maximum value of assets senior Australians can own (in addition to the family home) has been cut. Assessable assets are all sources of income, including superannuation and financial investments. Homeowner couples with over $823,000 of assets will no longer be eligible for the pension, while couples with more than $451,500 of assets will have their pension reduced. For singles, the maximum asset total is $547,000 and pension reductions kick in at $289,500.
The current average pensioner asset total is $113,000, although this increases for retirees with superannuation to about $200,000. The average asset value of pensioners is likely to keep on increasing as the next generation of retirees have higher superannuation totals.
“Those impacted by these changes will be able to maintain their current level of income by drawing down less than 1.84 per cent on their additional assets ($574,000 for a single homeowner), in a worst case scenario,” Social Services Minister Scott Morrison said in May when he announced the changes.
“It is common for pensioners not to draw down on their assets whilst receiving the pension. Research by the Department of Social Services on asset holdings of pensioners revealed that during an individual’s last five years of receiving the pension, 42.5 per cent increased their asset holdings and 24.7 per cent maintained them at the same level.
“Less than a third of pensioners actually saw their assets decrease in their last five years.”
The clear implication of the changes is to encourage current and future pensioners to use more of their own wealth (superannuation investments, income from shares, cash, etc.) and be less reliant on age pensions, while ensuring those with fewer assets have higher government payments. From a retirement living perspective, the pension changes have some unintended consequences for people who may be seeking to ‘downsize’ and move to a retirement village or any smaller home that is cheaper and easier to maintain.
Consider the example of Judith and Beatrice, two single 70-year-old retirees who both own their own home, have $300,000 of non-home assets and who, under the new rules to come into effect in 2017, will receive an annual age pension of $18,460.
- Judith decides to sell her home for $500,000 and downsize into a smaller home costing $300,000. This transaction increases her total assets to $500,000.
- Beatrice sells her home for $400,000 and buys a larger home for $500,000, using some of her non-home assets, which therefore are reduced to $200,000.
Neither Judith or Beatrice’s overall wealth changes after these transactions, but under the age pension asset test, Judith will lose her entire pension, while Beatrice will get an increase of almost $4000 a year.
This goes to explain why many people choose to keep their assets locked up in their family home instead of downsizing – none of us want to lose a $20,000 yearly income stream.
This is borne out by empirical research –a survey done by National Seniors last year showed that 30 per cent of pensioners who are considering downsizing see the pension asset test as a significant barrier.
This situation must change. There are ways to remove this perverse disincentive to downsize, without touching the value of the family home, such as exempting a certain amount of proceeds from the sale of the family home from the asset test. This could be done on a targeted basis, for those that would most benefit from such a move – full age pensioners, for example, who have wealth locked up in their home but very little else.
The benefits of such a policy change include:
- Increasing the independence of senior Australians, especially those who are becoming frail or have chronic health problems, and delaying their need to live in residential aged care
- Allowing more senior Australians to enjoy a higher quality of life by accessing services they currently struggle to pay for or can’t afford, such as private health care, home care and other services such as ‘Meals on Wheels’
- Enables pensioners to support themselves better and reduces their need to access taxpayer funded services
With the increase in senior Australians in the next three decades, more and more people will consider ‘downsizing’ as a pre-emptive solution to health or mobility problems and isolation. Hopefully future changes to the age pension will go some way to making this choice a sensible financial decision too.
Mary Wood
The Retirement Living Council
This article first appeared in The Retiree Magazine (www.the-retiree.com.au)