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A positive pension change with a cash rate twist

Later this month around 630,000 Australians currently qualifying for a partial age pension will receive a welcome fortnightly payments boost.

 

 

How much extra is received by individuals and couples in this cohort – a subset of the approximately 2.5 million people who are paid an age pension benefit – will vary and depend on their total level of financial assets.

But it's the reason behind this looming retirement pay rise that's most interesting, because it goes to the heart of events that have been happening on global financial markets, and at a monetary policy level, for some time.

These events could also point to further age pension rises down the track.

This month the Reserve Bank of Australia board opted to keep official interest rates on hold, after having cut them by 0.25 per cent to a record low 1 per cent in July. That followed a 0.25 per cent cut in June to 1.25 per cent from 1.5 per cent, the level they had been sitting on for three years.

As official rates have fallen over time, so have the returns from cash-linked products such as bank savings accounts and term deposits that a large number of retirees use to generate income.

And that has become a costly problem for those retirees holding sizeable amounts of cash who are means tested for the age pension based on the return the government "deems" their financial investments to be earning.

In what is a highly complex system, around 1.6 million Australians qualify on both an income test and assets test basis to receive the full age pension benefit. The majority of those on the pension earn little or no additional income above their payments and have limited assets, with the family home exempted for pension assessment purposes.

Department of Social Services data shows a further 318,282 retirees qualify for a part-pension on an "assets test" basis.

Individuals and couples are assessed on whether they do or don't own a home, and can hold up to a certain value of assets before their pension is reduced under what's known as the taper rate.

And then there's a larger group of 627,850 retirees who receive a part pension by qualifying under the "income test". This test is based on how much additional income they actually earn, and how much of a return their financial investments are "deemed" by the government to be earning.

It's in this segment where many will receive an age pension pay rise this month, backdated to July 1.

Until July, retirees holding financial assets such as cash, shares and other investment holdings including superannuation, were deemed to be earning a return rate of 1.75 per cent per annum on the first $51,200 (for singles) and $85,000 (for couples). All financial assets above these levels were deemed to be earning 3.25 per cent.

Now, reflecting the progressive cuts to official interest rates by the Reserve Bank down to current levels, the government has determined to cut these deeming rates and simultaneously increase the financial assets assessment levels.

The government's new minimum deeming rate has been cut by 0.75 per cent to 1 per cent (bringing it into line with the official cash rate), while the maximum deeming rate has dropped by 0.25 per cent to 3 per cent.

At the same time, the financial assets assessment level for singles and couples has been increased slightly to $51,800 and $86,200 respectively.

The deeming rates feed directly into the income test assessment, which allows singles to earn up to $174 per fortnight – including both real and deemed income – without being penalised. Singles lose 50 cents of their pension for every dollar earned above this level. For couples, the maximum fortnightly income is $308 before their pension payments are reduced.

Pocketing the changes

While not delivering massive financial benefits, the deeming changes will certainly be meaningful for many retirees.

How much extra an individual or couple receives is tiered and will come down to their financial assets, and whether or not they are homeowners.

The amounts detailed below are the sweetest spots from the new deeming rates before other factors used to assess age pension entitlements result in lower payment increases.

A single homeowner with $280,000 can expect to receive an additional $510 per annum based on the new deeming rates, and a home-owning couple with $410,000 in financial assets an extra $789.

A single non-homeowner with $520,000 can expect to receive an additional $810 per annum, and a non-home owning couple with $670,000 in financial assets an extra $1,114.

What's clear is that the changes to deeming rates are a positive, and underscore the importance of ongoing reviews of the financial components used to assess age pension entitlements and payments.

As noted in the 2018 Vanguard research paper The role of the age pension in your retirement plan, the age pension is a meaningful portion of retirement income for most Australians, and should be considered a key part of the retirement planning process.

 

 

Tony Kaye
Personal Finance Writer, Vanguard Australia
10 September 2019
vanguardinvestment.com.au

 


Sam El Shammaa

Sam El Shammaa

Director/Financial Planner

For more than 20 years, Sam has been a financial planner helping individuals and families achieve their financial planning goals, by providing advice on Investment Planning; Insurance Planning; Tax Planning; Retirement Planning; and Estate Planning. Working with a network of highly skilled professionals in Sydney he is dedicated to providing high-quality advice and integrated wealth management solutions that simplify and enhance the quality of his clients' lives.

Sam established his own firm in 1997 and has overseen its steady development and growth. Attention to detail, good listening skills and great empathy are symbols of his appreciation by his clients. He has built long-term relationships with his growing client base and aims to provide excellent customer service.

Sam began his financial planning career in 1993 after completing a Bachelor of Science degree in 1991. Since this time he has accumulated many professional qualifications such as:

Sam has volunteered with the Cancer Council of NSW and can be seen almost every year volunteering or participating in the 7 bridges walk.

Away from the business, he enjoys spending weekends with his son. He is also a football (soccer) tragic and is a massive Chelsea FC fan.



George Pereira

George Pereira

Financial Planner

Having worked for national financial planning companies in the past, George has extensive experience in the provision of advice in risk insurance, investments and retirement planning and is focused on forming long-term relationships with his clients.

George has been awarded a Masters of Commerce (Financial Planning) and a Bachelor of Commerce through University of Western Sydney as well as having the Diploma of Financial Services (Financial Planning).


Jane Lim

Jane Lim

Financial Planner

Jane Lim is a friendly character with a bubbly personality. She has the unique ability of making complex information sound simple and easy to digest.

Jane entered the financial services industry in 2006, and worked with big blue-chip financial companies such as Count Financial Limited and AMP Financial Planning Pty Ltd.

She holds a Master's degree in Applied Finance through Macquarie University, and she is a member of the Million Dollar Round Table.

Being a self-confessed "tennis nut", Jane spends many weeknights in the tennis court, and is a frequent member of Sydney's Eastern Suburbs Tennis Competition.

Being a highly motivated professional, Jane is always eager to help her clients on a wide range of financial planning needs.

Paul Jayashekar

Paul Jayashekar

Financial Planner

Paul has been a financial planner for over 15 years helping individuals and families successfully achieve their financial planning goals. He is very focused on building successful long-term harmonious relationships with his clients.

He provides a holistic approach on various aspects of financial advice encompassing areas such as Investment Planning; Insurance Planning; Tax Planning; Retirement Planning and has extensive experience and knowledge in these fields.

Paul's professional qualifications are:

Away from his professional life, he enjoys spending his time with his family doing various activities such as coaching his son and taking him to games. He is a very avid sports fan and a cricket enthusiast.

Christian Tanadinata

Christian Tanadinata

Client Services Manager

Christian joined Capitalwise as Client Services Manager, with backgrounds in both customer service and administration.

Christian is passionate in providing excellent customer service by being attentive to client’s need as well as being able to circumnavigate challenges.

He holds a Master's degree in Commerce specialising in Marketing through the University of New South Wales.

Volunteering is one of his delights in life, where he had spent time being involved with the Centre for Volunteering, St Vincent de Paul's Society, and Sculpture by the Sea in a variety of positions.

Jenny Zhou

Jenny Zhou

Administration Assistant

Jenny is a University of New South Wales graduate who joined the team as an Administration Assistant. She is keen to put her customer service and organisational skills to use, making sure day to day operations run as smoothly as possible.

Outside of work, Jenny focuses her efforts on karate and ice hockey. She can often be found coaching and practicing karate at her alma mater. The rest of her time is spent at one of Sydney’s many ice rinks playing, practicing, or officiating ice hockey.

In order to better serve you, please select the appropriate contact details for the department you are looking for below.

Department Phone Email
Financial Planning (02) 8599 0835 (Option 1) info@capitalwise.com.au
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