Last Stop On The Pension Train Is Tempting, But Not For All

Sydney Morning Herald

Saturday September 1, 2007

Annette Sampson

IF THERE's one thing investors respond to, it's a closing down sale. Last chance, get in now or you'll miss out has always been a compelling proposition - which is why it's surprising we haven't been bombarded with exhortations to act before the looming September 20 deadline for changes to the social security system.

In less than three weeks, two major changes will come into play that will dramatically change the income prospects of many retirees.

First, the assets test taper rate - the amount by which your age pension is reduced for every $1 of assets you have above the minimum threshold - is being halved from $3 to $1.50. This means many existing part-pensioners will be eligible for more pension and a swag of retirees who currently don't get a pension at all, will be eligible.

The new rules will allow couples who own their own home to have up to $825,500 in assets before they lose their pension entitlement, while single home owners will be allowed assets up to $520,750. At the moment, the cut-off levels are $531,000 and $343,750 respectively.

A couple with assets of $500,000, who would currently be entitled to about $2400 a year of age pension, can look forward to an extra $200 a week - without having to do anything.

But the trade-off is that the current 50 per cent assets test exemption for certain retirement income products is to be abolished. Unless you have bought one of these products before September 20, all of your assets will be included in the assets test.

When the old 100 per cent assets test exemption was cut to 50 per cent a few years back, there was a flurry of activity as retirees locked in their entitlement before the rules changed. But there doesn't seem to be the same frenzy this time around.

IPAC Securities manager of advice development, John Dani, says the new taper rate will boost pension eligibility so significantly that many retirees will benefit without having to lock money away in one of these pensions. There may also be some complacency among investors (and advisers) that they don't need to do the sums because the new taper rates are so generous.

But there will still be instances where locking in can enhance pension entitlements and retirees should be reviewing their positions before the deadline.

Macquarie Bank's division director, David Shirlow, says a retiree eligible for a part pension could generate an extra $75 a week in age pension for life by investing $200,000 into a term allocated pension (TAP) or complying pension. That's not to be sneezed at.

Dani says there may also be flow-on benefits. Money invested in these pensions before September 20 will be wholly exempt from the aged care asset assessment, which determines the accommodation bond payable when you enter aged care facilities. So if you're likely to use such accommodation - even if it's further into the future - it may pay to act now. Dani says the fact that you are now eligible for an age pension will also reduce the daily care fees payable.

If you're still working past age pension age, he says, investing in one of these products may also boost any payment you receive under the pension bonus scheme. This scheme provides a lump sum for people who defer receiving their age pension. Dani says the lump sum is based on your initial pension rate, so any strategies you undertake to boost your age pension could also boost your pension bonus.

The knock, of course, is that both TAPs and complying pensions are more restrictive than other pension products. They are structured for at least 15 years or your life expectancy and can't be cashed in. With complying pensions you receive a known income for the pension term, and with TAPs you receive a pension based on your life expectancy and account balance - though this income is much less flexible than with products like standard allocated pensions.

Shirlow says the lack of access may not be the issue it once was, thanks to the new taper rules. Previously, a couple with assets of $800,000 would have had to put about $600,000 of their assets into one of these products to qualify for a part pension. From September 20, they'll be able to enhance their age pension entitlement significantly by contributing just $100,000 or $200,000.

"It's not as though many of these retirees would be looking to draw on that last $200,000 of wealth," he says.

However, Dani warns against contributing too little. "You need a buffer," he says. "If you have $850,000 and want to invest $100,000 you need to acknowledge that your other investments could grow over time and you may lose your age pension anyway."

With fund managers unlikely to offer TAPs after September 20 (and demand for new complying pensions likely to be muted), there's also the issue of whether these will become legacy products. That is, products which fund managers have little incentive to keep going.

Shirlow says TAPs were designed to operate alongside the popular allocated pensions and so won't require special effort to maintain. But he says there is a question mark over whether investors will be able to switch to a new product if they are unhappy with their provider. He says the industry has written to the Minister for Families and Community Services asking for clarification on the new rules. While it's clear investors will be able to switch from one investment option to another, the question of whether they will be able to change providers (and keep their assets test exemption) is murky.

Dani says those most likely to benefit from locking part of their money into these products are retirees who will be eligible for a part pension under the new rules, or those just over the upper assets test threshold. The challenge for these investors in the next few weeks will be weighing up the potential benefits without succumbing to either complacency or hard sell.

© 2007 Sydney Morning Herald

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