The age pension asset rules have recently undergone changes, affecting large numbers of Australian retirees. Find what the changes are, how they might affect your pension, and how to renovating your home can put more money in your pocket every fortnight.
Over my extended career as a financial advisor I think if I asked the above question to many retirees, it would always come with a resounding “yes!”. Changes to the age pension that came into effect in early 2017 have seen Australian retirees (and those who are about to retire) be dealt a significant blow when it comes to funding their retirement.
Before explaining how this is possible, we need to review the age pension landscape and the changes that came into effect 1 January 2017.
A large number of Australian age pension recipients have had their age pensions reduced or cancelled entirely as a result of changes made by the government. This reduced the amount of assessable assets that singles or couples can have before their age pension starts to be affected. For those receiving a full pension before the changes the following strategy will not apply. However, for those that were getting a part pension it has now been reduced or cancelled, coming at a significant cost. The loss in some cases could be up to $13,000 per annum of regular income.
Asset limits before and after the changes on 1 January 2017
Family Situation Asset test threshold prior to 1 Jan 2017 Asset test threshold from January 2017 Single – Homeowner $205,500 $250,000 Couple – Homeowner$291,500$375,000 Single Non-Homeowner$354,500 $450,000 Couple Non-Homeowner$440,500 $575,000
The above table shows how much a retiree can have in assets (excluding their own home) to qualify for the full age pension. Once over these limits the age pension entitlement will reduce for every $1,000 above the asset threshold. Assessable assets include: cash in bank accounts, superannuation, allocated pensions, shares, term deposits, home contents, boats, caravans, investment properties and selected types of annuities. The asset test is fairly far reaching and the only exempt asset really is the family home.
Under the old rules, the age pension would be reduced by $1.50 per fortnight for every $1,000 over the above limits but under the new rules this has been increased to $3.00 per fortnight. Effectively this means that the age pension is lost faster as assets increase.
Reduction in age pension for single homeowners
Assets Age Pension (old rules) Age Pension (new rules) Difference $200,000 $22,542 $22,542 $0 $300,000 $18,856 $18,642 $($214) $400,000 $14,956 $10,842 $($4,114) $500,000 $11,056 $3,042 $(8,014) $6000,000 $7,156 $0 $(7,156)
Reduction in age pension received for couple homeowners
Assets Age Pension (current rules) Age Pension (new rules) Difference $200,000 $33,982 $33,982 $0 $400,000 $29,750 $32,032 $2,282 $600,000 $21,950 $16,432 $(5,518) $800,000 $14,150 $832 $(13,318) $1,000,000 $6,350 $0 $(6,350)
What can be done to increase the aged pension?
As the family home (principal place of residence) is not an assessable asset, any money spent on renovations will reduce assessable assets and the age pension entitlement is automatically increased once Centrelink is advised. The reason this is such a smart strategy is that although assessable assets have decreased giving a lift to the age pension, the actual net worth is still the same. Take a look at the following case study to explain.
Bob and Julie own their own home valued at $700,000 and have a further $600,000 in investment assets (term deposit, superannuation and shares) prior to renovating their home. Their annual age pension entitlement before 1 January 2017 was $21,950. After 1 January 2017 it was reduced to $16,432. If they were to spend $100,000 renovating their home, their new assessable assets would be $500,000. Their age pension would increase to $24,232 per annum. An increased amount of $7,800 each year. Realistically over the next 10 years Bob and Julie will receive $78,000 in additional age pension for spending $100,000 on renovations. This has increased the value of their home and means their net worth remains unchanged. Refer below table
Assessable Assets Pension entitlement Difference Value of family home Total Assets Before Renovating $600,000 $16,432 p.a $700,000 $1.3 million After Renovating $500,000 $24,232 P.A $7,800 p.a $800,000+ $1.3 miilion
What are the additional benefits of renovating?
The obvious benefit is a more modern and comfortable home which will improve liveability, energy efficiency in a lot of cases, and mean far less maintenance at a time when retirees are trying to make life easier.
Another consideration is the ever-increasing cost of aged care. Renovating may reduce assessable assets and in turn reduce the lump sum payable and the ongoing fees for aged care. This would be on a case by case basis and professional advice should be sought.
At the current time, where retirees are struggling to get 2% interest on bank deposits, there really has never been a better time to consider renovating your home. If I had $100,000 in a bank deposit earning 2% per annum ($2,000), I know I would much rather spend my money and live in a renovated, maintenance free home, potentially increasing my age pension entitlement by up to $7,800 per annum.
If you would like more information on renovating your home into a space you love, get in touch with a renovation specialist to arrange a free consultation.
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If you would like to find out how Refresh Renovations can support you with a high quality, efficient home renovation, get in touch today. Your local Refresh consultant will be happy to meet with you for a free, no obligations consultation.