Age Pension changes to affect most retirees

Age Pension changes to affect most retirees

Around 76% of retirees in Australia rely on Age Pension currently and the rules are about to change. For the worse!

With the Government running up budget deficits, a wave of baby boomers about to retire — at the rate of almost 5,000 per week — and the fact our life expectancy is predicted to get longer, this is hardly surprising. But the impact on retirees is going to be significant.

As of 1st January 2017, people with assessable assets outside of their family home in excess of $450,000 will be affected. People with assets over $823,000 will be the worst affected, losing as much as $14,450 of annual pension benefit.

What this means essentially is that a large percentage of the population will be forced to rely more heavily on their limited retirement assets, making it even more important to invest prudently with what they have got.  

The Association of superannuation funds Australia says that for couples to achieve a comfortable living, they’d need $58,136pa. From our experience, this is a fairly typical need, if not light on, when one considers lump sum expenses that tend to crop up like upgrading the car or travelling, for example.

To illustrate the impact for a part pensioner, before and after the changes, we’ve highlighted three examples:

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     Source:  FPA Roadshow,     Challenger    Life presentation

Source: FPA Roadshow, Challenger Life presentation

What these tables show is the difference in pension different people will be entitled to, compared to what they were entitled to in the past. When you consider that someone with $900,000 is now over 20% more reliant on self-generating their income needs, it is simple to see how significant these changes really are. It’s important to be on the front foot by planning to make the best of the situation, especially given the challenging investment markets we face globally and the inherent risk that exists if global growth objectives for the world’s economies are not achieved.

There are several things that can be considered to mitigate some of the impact of these changes. At Yield we work through these options with our clients to try and find the solutions that meet their individual objectives, while remaining conscious of risk, to allow our retiree clients the opportunity to have less to worry about.

If you or someone you know are one of the 1,000s of people who will see their Age Pension reduced (possibly to zero) from 1 January 2017, it’s imperative to review the options available to help continue to meet your income goals.

As it stands, many people will be forced to consider a greater drawdown from their existing retirement reserves, like a superannuation pension for example, adding pressure to longevity of funds. One option that exists that could be appropriate to help cushion the impact of the changes is to include a strategic investment into a lifetime annuity.

The following example highlights how the technical benefits of a lifetime annuity can help a retiree reduce the impact of the 1 January changes and also enhance their annual cash flow through an increased age pension entitlement. The example is based on a homeowner couple both aged 65 with $30,000 in personal assets and $300,000 each in an account based pension (started in July 2015).

In summary, by each of them allocating 20% of their account based pension to a lifetime annuity, they have been able to:

  1. Receive guaranteed income of $3,000pa each, fixed for life. On the 15th year anniversary (at the end of the guarantee period) they each still have the option to withdraw 75% on the initial amount invested (that is $45,000 each) if they want.
  2. Increase the amount of age pension received from year 2. Over 15 years the overall increase in age pension is approximately $49,900.
  3. Reduce the impact the changes to the Centrelink Assets Test (effective from 1 January 2017) could have on their age pension benefit. That is the overall decrease in age pension (in year 2) is lower than it may have been if they did not include the lifetime annuity.
  4. Shorten the time taken for their age pension to return an amount similar to what they were receiving before the change. That is using the lifetime annuity, it occurred by year 8 (new portfolio), rather than by year 12 (current).
  5. Enhance their overall cash flow through the combination of the annuity’s annual payment with the additional Age Pension entitlement. This is illustrated by the ‘Annuity cash flow with pension boost’ row.

At Yield, we understand these issues and can advise on how an annuity or a variety of other strategies could improve a retirement outcome.

For most retirees after all, they want security and peace of mind that they can enjoy their retirement years knowing their financial strategy is clear.

To find out more about the likely impact of these changes on entitlements and to explore strategies to help reduce the impact, speak to one of our Financial Planners.

We recently shared our thoughts in an article published in The New Daily. Read it here:




Prashant Nagarajan is providing his expertise at our Learn From the Experts — Guide to Retirement Income Startegies seminar in Melbourne on Wednesday 21st September 2016. Come along for more tips, advice and information about how to prepare for your retirement. Click here for more info and to rsvp.


The content of this presentation is intended to be general information only and has been prepared without taking into account any person’s objectives, financial situation or needs. Each person should consider its appropriateness having regard to these matters or obtain relevant professional financial advice before making any financial decisions.  Examples are illustrative only. Each person should obtain any relevant professional financial, taxation and social security advice before making any financial decisions.