It’s all a bit hush-hush but there are big changes to the way the age pension will be calculated from 1 January next year. The changes apply to the asset test and are expected to affect around 350,000 Australian pensioners.
How does the asset test work now?
Currently, a person or couple who exceed the asset test threshold have their pension reduced by $1.50/fortnight for every $1,000 of assets over the threshold.
How will it work after 1 January 2017?
There will be an increase in the asset test threshold, enabling some pensioners to receive more pension. For those who exceed the new threshold their pension will be reduced by $3/fortnight for every $1,000 of assets.
The new Asset Test Thresholds will be:
$250,000 for a Single Homeowner (up from $209,000)
$375,000 for a Couple Homeowner (up from $296,500)
Higher thresholds apply to non-homeowners.
Why does it matter?
Well, people who downsize to a retirement community often pay less for their new home than they get for their old one – banking the proceeds. And while this strategy can free up capital to buy a caravan to travel around Australia or earn a bit more income to fund their lifestyle, it is important to understand the impact this will have after 1 January 2017.
Shirley is a pensioner who is considering moving from her family home to a retirement village. Her home is worth $730,000 and the home she would like to buy in the village is $530,000. Shirley also has $120,000 in the bank, and $10,000 worth of personal assets including her car. While she lives at home Shirley receives $874/fortnight of age pension. If Shirley moved to the village today her pension entitlement would reduce to $692/fortnight (a reduction of $182/ fortnight). While she can earn interest on the extra $200,000 in her bank account, at 2% this money will provide her with only an extra $154/fortnight of income.
After 1 January Shirley’s pension would reduce again to $634/fortnight.
What can she do?
Well, she could stay at home — wishing she could afford to move to the village. Or she could negotiate with the retirement village to pay a higher purchase price in exchange for a lower exit fee (yes, it’s possible). If Shirley paid $730,000 she would receive the full pension again (if she receives a Home Care Package her cost will reduce by around $13/fortnight) and she will have more money left over if she ever needs to move again.
If you would like assistance to ensure that you aren’t downsizing your pension during your aged care transition, contact us to today.