July 20, 2017
Usually retirement means the end of formal employment or the selling of a business. For most people, it will mean the end of a regular income through salary/wages or business income. The purpose of retirement planning is then to ensure that people will have a certain quality of life in their retirement. Each person will have somewhat different objectives, but almost all people will have limited resources. This means it will be important to work through a person’s objectives, both leading up to retirement and in retirement.
Social security considerations is an area that will often have a major influence on financial decisions of the retired and those nearing retirement. These considerations will ultimately affect the level of income stream taken from pensions/annuities, and may also see a reconstruction of asset and income levels of many individuals. Maximising income in retirement is desirable for most. Total income may be increased and an individual’s overall financial situation improved by implementing social security strategies.
The amount of government pension or allowance payable to an eligible person depends on the level of income and assets that person is assessed as owning. It is therefore possible to increase a person’s social security entitlement by implementing strategies to reduce the amount of their ‘assessable’ income or assets.
Superannuation has long been the best strategy for those wanting some social security benefits, in particular from 1 July 2001, where superannuation is only means tested once a person has reached age pension age.
Let’s look at Peter (age 65) and Mary (age 60), who are retiring and have the following assets:
- Principal home: $450,000
- Home contents and car: $50,000
- Bank account and term deposits: $50,000
- Peter’s account based pension (ABP): $500,000
- Mary’s super (accumulation): $300,000
They would like to maximise any Age Pension Peter might be entitled to. Let’s look at implementing a strategy of re-contributing from Peter’s ABP to Mary’s super and leaving it in the accumulation phase while she remains under age pension age.
To optimise Peter’s social security situation, one of the options is to cash out $300,000 from Peter’s ABP and recontribute it to Mary’s super account, using the ‘bring forward’ rule. Mary’s super is then left in accumulation phase, where it is exempt from the Centrelink’s assets and income tests. By re-contributing this amount, their assessable assets are reduced below the lower assets test threshold, meaning Peter will receive the maximum age pension under the assets test. Note that they will also receive the maximum age pension under the income test in this case.
Here is the impact of this strategy:
|Peter’s age pension under assets test (pa)||8,851||17,410|
|Assessable income (pa)||16,624||6,874|
|Peter’s age pension under income test (pa)||15,204||17,410|
|Peter’s age pension (pa) – actual||8,851||17,410|
This comparison shows that Peter can obtain an additional $8,559 pa in Age Pension as a result of recontributing $300,000 and Mary leaving her super balance in accumulation phase. However, this needs to be offset by the fact that more of their super is now in accumulation phase and subject to tax on earnings. Assuming a 5% pa return taxed at 15% in accumulation phase, this is an additional tax of $2,250 pa. The net benefit of the strategy is therefore $6,309 pa, which is an additional return of 2.10% pa on the $300,000 recontributed.
The actual benefit of this strategy may in practice be even higher. This is because some providers offer better discounts to full pensioners, as opposite to part pensioners.
If in this scenario Mary was also providing care to her elderly mother and receiving the Carer Payment, the benefit of the recontribution strategy would double to $12,618 pa, making the effective additional return from this strategy 4.20% pa.
Strategies such as this are available with good advice. So, let us help you to increase your funds smartly pre-retirement and make the best use of your funds throughout your retirement.
- Calculations are made based on the rates effective 20 March – 19 September 2017;
- The account based pension is deemed for income test purposes.
- Mary has not made any superannuation contributions in the last 3 financial years.