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Time to review your Account Based Pension?

September 13, 2018/in Financial Advice General Info /by Shellie Fisher

On the 1st of January 2015, the age pension assessment of account-based pensions changed. Assessment of account-based pensions was brought in line with other “financial Investments”.

What does this mean?

The balance of the account-based pension, regardless of the income being drawn down, was assessed in the same way as money invested in bank accounts, shares, and managed investments. Income was calculated by deeming an interest rate of either 1.75% or 3.25% – the rate depends on the balance of your other financial assets.

For retirees in receipt of age pension at the time, this new method of assessing account-based pension income could have resulted in a reduction in their age pension. To ensure retirees were not disadvantaged the previous method of assessing account-based pension income was “grandfathered”.

This “grandfathered” assessment was based on the following;

The amount of capital used to commence the pension is divided by the life expectancy of the pension recipient (or the longer of the two pension recipient’s life expectancies, where a reversionary pensioner is nominated). The result amount is referred to as the “deductible amount”. This amount remains constant for the life of the account-based pension unless a lump sum withdrawal is made from the pension account, at which time the deductible amount is recalculated.
The amount of the account-based pension income currently assessed under the “grandfathered” income test is the actual income drawn from the account-based pension, minus the deductible amount. Providing a person did not roll their account-based pension to a new provider the old assessment was retained. However, like all good investments and strategies in retirement – regardless of legislative change – they should never be viewed as a set and forget

All investments and strategies should be reviewed on a regular basis and account-based pensions are no exception. The first point to consider when you are reviewing your account-based pension – as a pensioner ages the amount of income that is required under legislation to be drawn from your ABP increases, meaning that a person rather than being disadvantaged by the new rules could, in fact, be better off being assessed under the new legislation.

The second point concerning the income being drawn from an account-based pension occurs when a pensioner enters aged care and they need to draw more income from the account-based pension to cover their fees.

The following example may make it a little easier to understand;

At the age of 65, a single man invested $300,000 into an account-based pension and was drawing an amount of $15,000 as income on an annual basis. At the time of this investment, his life expectancy was 15.41 years, meaning $19,467 ($300,000 divided by 15.41) was assessed as his “deductible amount”. So, providing he did not draw a yearly pension in excess of this “deductible amount” his age pension was not affected by the application of the income test.

This gentleman is now 85 years of age and has entered residential aged care. To assist in paying his aged care fees he is now drawing $30,000 per annum from his account-based pension which means an amount of $10,533 per annum ($30,000 – $19,467) is being assessed as income for the purpose of calculating his age pension and his aged care fees.

If this gentleman were to roll his account-based pension which is now only $250,000 to a new provider, the pension would now be assessed under the new legislation in other words deemed at the interest rates mentioned earlier in the article and only $7,357 per annum would be assessed as income. This would mean his age pension would increase slightly, and his aged care fees would reduce by a small amount.

This does sound very complicated, but the very point of this blog and the examples shown demonstrate that as your circumstances change you do need to review your position to ensure you are not being disadvantaged. The best person to speak to is a financial planning expert who understands legislation and has the necessary experience to point you in the right direction.

Source: Mark Teale | Centrepoint Alliance

Age Pension and the question of residency

June 21, 2018/in Financial Advice General Info /by Shellie Fisher

To qualify for an age pension, you first need to reach the necessary qualifying age, which depends on the year you were born.

You also need to be an Australian resident. According to the Social Security Act, this requires you reside in Australia and be either an Australian citizen or the holder of a permanent visa.

In addition to residing in Australia when you apply, you also need to have resided in Australia for a continuous period of 10 years or have resided in Australia for several periods that total more than 10 years with at least one of these times for a continuous period of 5 years.

For those people who may not necessarily have the required period of Australian residency, there is one further avenue available to assist you in qualifying. This will depend on whether you have previously resided in a country that Australia has an International Social Security Agreement.

What is an International Social Security Agreement?

They are international treaties which modify the social security law of the countries which have entered into the Agreement, enabling the special provisions of the Agreement to override the social security legislation in certain situations.

Australia’s Agreements are based on the principle of shared responsibility. That is, each country pays a benefit which reflects the person’s association with that country’s social security system.

These Agreements improve social security for people who move between countries, particularly the following groups of people:

those in Australia and the Agreement country who do not otherwise meet minimum residence and/or contribution requirement for pension from either or both social security schemes;
those in the Agreement country who qualify for an Australian pension but cannot claim one because they are not an Australian resident

Australia has Social Security Agreements with 16 countries, which include Austria, Belgium, Canada, Chile, Croatia, Cyprus, Germany, Ireland, Italy, Korea, Malta, Netherlands, Norway, Portugal, Slovenia and Spain.

What does this all mean?

For example, if an individual has lived in Australia for a period of seven years and has reached the appropriate qualifying age pension age, they would not be entitled to the age pension because they haven’t met the necessary residence requirements. However, if they also have five years of contributing to (say) the Italian social security system, these two periods can be combined, and they would meet the residence qualification for an Australian age pension under the Social Security Agreement that Australia has with Italy.

Be careful as not all Agreements are the same and years of residence in another country, even if Australia has an Agreement with the country, may not count in the same way as the Italian Agreement used in this example.

The Agreements don’t allow someone who has lived overseas for many years to return to Australia and claim an Australian age pension, and then return to their actual place of residence overseas and continue to receive the Australian age pension, regardless of how long they may have lived and worked in Australia before moving overseas.

Source: Mark Teale | Centrepoint Alliance

Budget 2018 – What does it all mean?

May 17, 2018/in Financial Advice General Info /by Shellie Fisher

What does this year’s budget have to offer?

With a federal election clearly in the wind, the budget contained a little bit of something for almost everyone.

Unlike the 2016 budget that included massive changes to super, this year’s budget was a lot lighter in terms of super announcements. However, there were a few including:

Allowing people aged between 65 and 74 to make voluntary contributions super in the year after they cease working, without having to meet the work test. This will apply from 1 July 2019.
Increasing membership of self-managed super funds from four to six, from 1 July 2019.
Moving to a three-year audit cycle for SMSFs with good record keeping and compliance history. This will commence from 1 July 2019.
The ability for younger people and those with less than $6,000 in super to opt-in for life insurance cover inside their super. This differs from the current system where they have to opt-out if they don’t want life cover.
Some relief from the risk of breaching the concessional contribution cap for people earning more than a combined $263,157 from more than one employer.

The budget also contained some immediate tax relief for low to middle-income earners with the introduction of a Low to Middle Income Earners Tax Offset of up to $530. This will apply from 1 July 2018 and will be paid as a lump sum at the end of the financial year once an income tax return has been lodged.

There will be tax cuts across the board, however, significant changes, particularly for higher income earners, won’t come in to effect until 1 July 2024.

On the good news front, the planned increase in the Medicare Levy that was due to come in from 1 July 2019 is no longer proceeding.

The big winners from the budget were older Australians with considerable funds being directed to the delivery of residential and in-home aged care services.

The budget makes proposed changes to the Pension Work Bonus to take effect from 1 July 2019, which allows people to earn more from employment and self-employment in retirement without it affecting their age pension, and an expansion of the Pension Loans Scheme. The Pension Loans Scheme enables people to access a government-sponsored reverse mortgage scheme to top up their pension payments.

Source: Peter Kelly | Centrepoint Alliance

A comfortable retirement: what and how achievable is it?

April 12, 2018/in Financial Advice General Info /by Fil-Battisti

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According to the Association of Superannuation Funds of Australia (ASFA) numbers, released for the September 2017 quarter, a couple will need $60,457 per annum to fund a comfortable lifestyle in retirement, assuming they own their own home and have no debt and a single person would need $44,011 per year.

So how can the income required for a comfortable retirement be funded, and how much should be put aside each year prior to retirement to accumulate the funds required to fund a comfortable retirement?

Funding a comfortable retirement

ASFA calculates that $640,000 is sufficient to fund a comfortable retirement lifestyle. Their calculations assume a couple owns their own home and will receive Government age pension support when they retire.

It is assumed that $640,000 is held in a superannuation fund and used to commence an account-based pension. However if the funds were held outside super in joint names, there wouldn’t be any significant change in the outcome, as the couple are unlikely to pay any income tax on the portfolio returns. It is also assumed that the couple’s home contents and car are valued at $25,000.

The couple, both aged 67, would only draw what they need from their superannuation account-based pension to top up their age pension income to the required level for a comfortable retirement. The level of income needed, based on ASFA’s model, decreases from approximately $60,000 per year prior to age 85, to approximately $55,000 per year – this reflects a relatively less active lifestyle as age increases.

Although their age pension entitlement is just $12,000 (approx.) per annum in the first year, that entitlement grows over time as their assets reduce – the couple become entitled to the full age pension from age 91.

This analysis indicates that the income needed could be maintained until age 99, well beyond the life expectancy of a 67 year old female (age 87.3 years) or male (age 84.6 years). The couple’s account-based pension would run out by age 101.

This outcome is sensitive to the earnings rate assumption (6.7 per cent per annum). ASFA’s assumption of 7.0 per cent per annum increases the age to which the income level can be maintained by a year, to age 100.

Other sensitive assumptions include the amount of non-financial assets ($25,000) and financial assets, for example cash holdings ($nil). These assumptions may affect the couple’s age pension entitlement, hence the amount of pension payments that need to be drawn from the account-based pension. Note that financial assets may have a net positive impact due to the additional income produced.

Saving for a comfortable retirement

Taking ASFA’s numbers ($640,000 for a couple, $545,000 for singles) as appropriate funding targets, then a natural question is:

How much should be saved each year to reach the relevant funding target?

We are focusing on a single person reaching the $545,000 (in today’s dollars) funding goal by age 67, which is the Government age pension eligibility age for those born on or after 1 January 1957.

A key feature of retirement funding for Australian employees is the compulsory superannuation contributions employers are required to make on behalf of certain employees – the Superannuation Guarantee (SG) system.

The current SG rate is 9.5 per cent of an employee’s Ordinary Time Earnings (OTE). Generally, OTE relates to ordinary hours (excluding overtime), and includes commissions, shift loadings and certain allowances. The 9.5 per cent rate will increase by 0.5 per cent per annum from 2021 to 2025, ultimately to 12 per cent.

The Average Weekly Ordinary Time Earnings (AWOTE) for the October 2017 quarter was $1,567.90 or $81,755 per year. In our modelling we have used $80,000 per year. Employees with this amount of income will have SG contributions of 9.5 per cent ($7,600 per year, paid quarterly) paid by their employer to a superannuation fund. These contributions are generally taxed at 15 per cent, so $6,460 is available to be invested by the superannuation fund each year.

Table 1 below shows that a 30 year old with earnings of $80,000 per year may accrue $536,000 in superannuation between now and retirement at age 67 from their future SG contributions alone, assuming no breaks in their employment. This amount is only slightly short of the comfortable retirement target of $545,000.

Table 1: future SG contributions accrual to age 67

Current age	Current Ordinary Time Earnings
Current age	$40,000	$80,000	$120,000


20	$419,000	$837,000	$1,256,000
30	$268,000	$536,000	$804,000
40	$159,000	$319,000	$478,000
50	$81,000	$163,000	$244,000
60	$25,000	$51,000	$76,000

Table 2 below shows the amount the same individual in Table 1 would need to contribute to superannuation on an after-tax basis (non-concessional contributions) to reach the funding target of $545,000, assuming they have nothing in super currently. The 30 year old individual considered above would need to contribute only $124 per annum

Table 2: After-tax super contributions per annum to reach retirement goal at age 67

Current age	Current Ordinary Time Earnings
Current age	$40,000	$80,000	$120,000


20	$1,109	–	–
30	$3,773	$124	–
40	$8,723	$5,114	$1,495
50	$20,024	$16,506	$12,988
60	$64,940	$61,765	$58,587

These charts show that many Australians may be in a position to achieve a comfortable retirement, based on ASFA’s definition and assumptions. The Australian Superannuation Guarantee system is a significant part of achieving this outcome, which relies on the currently legislated increases in the SG rate to 12 per cent.

Before making any financial decisions you should seek personal financial advice from an Australian Financial Service licensee.

Source: Macquarie

Age Pension – don’t set and forget!

October 12, 2017/in Financial Advice General Info /by Shellie Fisher

Applying for an age pension is not an easy task.

There is a comprehensive application form and depending on your circumstances, numerous documents that need to be photocopied and lodged as well.

If an application is successful and the age pension is granted, many age pensioners never want to deal with Centrelink again.

It is extremely important for age pensioner to remember they have a legal obligation to notify Centrelink, within a 14 day period, of any change in their circumstances or assets.

The following is not a full list of changes in circumstances but provides examples of events when a pensioner is required to notify to Centrelink;

buy or sell shares or managed investments
open new bank accounts
have combined assets of more than the amount currently being assessed
receive a lump sum amount or one-off payment, e.g. inheritance
move into or out of a nursing home, hostel or retirement village
are charged with an offence and placed in prison or admitted to a psychiatric institution
gift more than $10,000 worth of assets in an income year
changes their employment
travel overseas for a period of more than 6 weeks
marry, separate, divorce, or become widowed
rent or sell their home, or purchases another

Centrelink review the value of share and managed funds automatically twice a year, in March and September. However, to ensure an age pension is being assessed correctly, it is extremely important for pensioners to notify Centrelink if they buy new investments or sell investments to pay expenses, or to travel.

It is also important to remember that if you fail to notify Centrelink of changes in your circumstances and Centrelink discovers they have overpaid the pension, they will raise the overpayment from the date the change was effective. On the other hand, if Centrelink becomes aware of a person’s pension being underpaid because of a change which was not notified or notified late, they will only adjust the pension from the date they became aware of the change and not from when the change actually took effect.

So, what is the best way of keeping Centrelink informed? Going into the local Centrelink office, or speaking to someone on the phone can seem either too daunting or requires the patience of a saint.

The best place to start is to establish an online ‘myGov’ account and link your Centrelink account.

Source: Mark Teale | Centrepoint Alliance