Increasing a client’s asset tested part Age Pension
Where a client is receiving an asset tested part Age Pension each $1,000 of assessable assets over the lower assets test threshold reduces their Age Pension entitlement by $3 per fortnight, or $78 p.a. It follows that where such a client reduces their assessable assets by $1,000 (but not below the lower assets test threshold) their Age Pension entitlement will increase by $78 p.a.
So, where an assets test sensitive client invests $100,000 in lifetime income stream assessable assets immediately reduce by $40,000 (where just 60% or $60,000 is assessable). This reduction in assessable assets has the effect of immediately increasing Age Pension by $3,120 (40 x $78 p.a.), or 3.12% of the $100,000 invested in the lifetime income stream, in the first year.
It is important to note that this relative increase in Age Pension will change in future years of any comparison based on the fixed assessable value of the lifetime income stream until the step down in assessable asset value from age 84 (where just 30% of the purchase price will be assessable) and the changing assessable value of any comparable asset (such as an account-based pension, for example, with its assessable value changing with investment earnings and income drawdowns).
Example 1: Diane and Des
Diane and Des, both age 66, are a couple who own their own home. They have $300,000 each in deemed account-based pensions, $50,000 in cash and term deposits they are keen to maintain in case of a rainy day and $20,000 of non-financial assets.
Diane and Des are drawing retirement income (from all sources) of $60,000 p.a., including combined Age Pension of $15,093 p.a. (a part Age Pension determined by the assets test).
Using the Challenger Age Pension Illustrator (available via Challenger AdviserOnline), Diane and Des’ adviser models an alternative strategy involving a 25% ($150,000 combined) allocation from their account-based pensions to lifetime annuities.
This alternative strategy provides guaranteed income for life for both Diane and Des,irrespective of how long they live or how investment markets perform.
This alternate strategy also has the effect of reducing their assessable assets by $60,000 ($150,000 x 0.4). And, because Diane and Des are assets test sensitive this has the effect of increasing their Age Pension from $15,093 to $19,773 (an increase of $4,680) in the first year alone. This additional $4,680 of Age Pension in the first year reduces by this same amount the income required to be drawn from their retirement assets, helping to sustain them over time.
Image 1 shows an extract from the Challenger Age Pension Illustrator highlighting the additional Age Pension payable to Diane and Des over years one to five of this alternative strategy, and the cumulative additional Age Pension over five and ten years.