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The “New” Government Pensions Loans Scheme – Do I Need Extra Income?

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It’s time to review the Pension Loans Scheme (PLS), how it operates, how it can assist either long term or short term and tell you about some new features.

Why did I think it is worthwhile revisiting the Pensions Loans Scheme (PLS)?

A couple of reasons.

1. The Government announced a couple of changes to the scheme in the May budget.

2. I have been receiving questions on how the PLS operates.

3. The increasing value in age pensioners homes.

Let us have a closer look at point 3 first.

Domain’s December 2020 quarterly house price report shows the average price for a home in Australia in December 2020 was $852,940. Melbourne was very close to $1 million, and in Sydney, the average price was more than $1.2 million.

In the first 5 months of this year, the average increase in property across all capital cities was close to 10%, meaning all the average values that I mentioned in the last paragraph have all increased by close to 10%.

So, how does this affect the average age pensioner in Australia? It does not; however, with the increase in the value of their home and the land that it is built on, pensioners may see increases in their annual home insurance and rates.

The government is very keen for retirees whose cash reserves maybe dwindling to access the increased equity in their home to improve their lifestyle, increasing their spending and reducing their reliance on the age pension, which all helps the economy.

The ability to sell your home and buy a smaller property and deposit the difference into superannuation – Downsizer Contributions – is one measure.
However, speaking to age pensioners there appears to be two issues with this measure which they are not all that keen on. Firstly, many have lived in their current home for a long time and are very comfortable where they live. It is a home full of memories. Secondly, selling and moving to a smaller home, and having more money in superannuation, can reduce their age pension, which they do not feel comfortable about.

Let us now look at points 1 and 2.

What does the PLS have to offer? The PLS provides the ability to access the equity in your home, increasing the amount of age pension you receive on a fortnightly basis to an amount of up 150% of the full age pension. For self-funded retirees who need to increase their income, they too can also access the PLS and apply for a fortnightly payment of up to 150% of the full age pension.

In practical terms what does this mean? As an example, a single age pensioner on the full age pension of $952.70 could access the equity in their home and receive up to an additional $476.35 per for fortnight. For a single self-funded retiree, they could access the equity in their home and receive up to $1,429.05 per fortnight.

How much of the equity in my home can I access?

This depends on your age, the value of your property, and how much of the equity you wish to maintain. To explain the process in simple terms I will use an example.

A single 75-year-old in receipt of the full age pension, who has a home valued at $850,000, who would like to retain equity in their home of $350,000. The following formula is the basis for the maximum loan amount:

$3,750 (age component value)* x (($850,000 – $350,000)) / $10,000 = $50,000. This is the maximum amount of the loan.

In practical terms, it means that our single age pensioner could receive an additional $476.35 per fortnight at the current interest rate payable of 4.5% on the loan for approximately 4 years.

This maximum loan amount can be recalculated and increased on a yearly basis, based on an increase in the value of the home and the increase in the pensioner’s age.
The payments made under the PLS are not taxable and are not assessable by Centrelink under the income test.

What are the changes to the scheme that the government announced in the May budget?

1. A person can now apply for a lump sum payment up to the maximum annual amount applicable to their situation. In the example above, this would mean that our single age pensioner could apply for a lump sum on a yearly basis totalling $12,385.10.

The downside to this advance lump sum is that it effectively reduces the extra fortnightly loan payments that they were receiving, after lump amount is paid and the total reaches $12,385.10 for the year to zero dollars.

2. The second announcement was the introduction of a ‘No Negative Equity Guarantee’, meaning that borrowers under the PLS, or their estate, cannot owe more than the value of their property.

I have provided a lot of information that is quite complex to understand. What I would like to point out is that the PLS gives age pensioners and self-funded retirees an extra avenue of accessing the equity in their home with a very credible lender “the Government” at a competitive interest rate of 4.5%.

Before you rush out and sign up for a loan under the PLS, make sure you understand how the scheme works in its entirety, and the pros and cons with regards to your own circumstances. The best way to do this is to speak with a professional.

*The age component value is based on a person’s age and will increase as a person grows older.

 

 

Source: Mark Teale | Centrepoint Alliance

Age pension entitlement… Am I receiving the correct age pension?

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It is a question that is often asked. Unfortunately, it is not always fully explained by the correspondence from Centrelink or Veterans Affairs.

On 20 March 2021 the Age and Service Pensions were increased, the first increase in 12 months. Pensions are normally adjusted or increased twice a year in March and September, but because of a negative CPI figure last year, there was no increase to the pension rates in September 2020.

The single pension was increased from $944.30 per fortnight to $952.70 per fortnight and the couples combined pension was increased from $1,423.60 per fortnight to $1,436.20 per fortnight.

Some pensioners will not see any increase in their pension and may in fact see a decrease.

Why would this be the case?

In addition to adjusting the pension rates for movements in the CPI in March and September of every year, Centrelink and Veterans Affairs also automatically review and adjust the value of a pensioner’s investments in Shares and Managed Funds.

Since September last year the share markets in Australia and around the world have grown substantially. For example, the Australian market has grown by approximately 16%, the UK market by 14%, the Hong Kong market by 21% and the US market by 22%.

The downside for pensioners who are receiving a part pension and are invested in these areas either directly or through managed funds is that they may see a decrease in their pensions because of an increase in the value of their investments.

It is extremely important for retirees who are receiving a pension from either Centrelink or Veterans Affairs to remember that your entitlement is based on your income and assets and any movement in these values can have an impact on your entitlement. Therefore it is imperative for pensioners to ensure that the information that Centrelink or Veterans Affairs hold is correct and up to date.

If the market were to fall as it did at the beginning of last year, you do not have to wait for the automatic review by Centrelink or Veterans Affairs in March and September. You can ask for a manual review to be conducted on your entire portfolio.

Please be careful when requesting a manual review. If you have one investment which is not performing, you are not able to request a review of just this investment, the review will be conducted on your entire investment portfolio.

If you are unsure of your correct entitlement based on your current share or managed funds portfolio, please speak to an expert.

 

 

Source:  Mark Teale | Centrepoint Alliance

Commonwealth Seniors Health Card – Do I qualify?

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The Commonwealth Seniors Health Card (CSHC) is a concession card issued to a person who is old enough, but not entitled, to receive either an Age Pension or a Veterans Affairs service pension.  Card holders are entitled to concessions in relation to their health care and the purchase of prescription medication.  Also, depending on location, card holders may also be able to access state or local government concessions as well.

The CSHC, unlike the pension, is not subject to an assets test. In other words, the value of the assets you have invested or own will not stop you from qualifying for the CSHC. However, the CSHC is subject to an income test.

The income test considers both your adjusted taxable income and, if you do have an account-based pension, the assessed deemed income based on the pension balance.

To pass the income test, the combination of your adjusted taxable income and any deemed income assessed on an account-based pension needs to be less than:

  • Single $55,808 p.a.
  • Couple $89,290 p.a. (combined)
  • Couples living separately due to illness $111,616 p.a. (combined)

These thresholds are adjusted on 20 September each year.

The adjusted taxable income is based on your taxable income (evidenced by your notification of assessment from your last tax return).  This taxable income amount is adjusted by any investment losses plus any reportable superannuation contributions, employer fringe benefits or foreign income.

If the notification of assessment references your final year of employment or the last year that your business was operating, you are able to provide an estimate of your income; providing, of course, you are no longer working or operating your business.

Added to this adjusted taxable income is the deemed income on any account-based pension that you may have.  As an example, if the value of your account-based pension was $1.5 million dollars, for a single person the first $53,000 of the balance would be assessed as earning 0.25% and the remaining $1,447,000 would be assessed as earning 2.25% meaning the total deemed income on the pension would be $32,690.  It is important to note that the actual income being drawn from the account-based pension has no bearing on the income that is assessed.

Therefore, provided your adjusted taxable income or the estimate of your income is less than $23,118 for that year, you would be entitled to a CSHC.

I should point out that if one member of a couple reaches the appropriate age and does apply for a CSHC, the partner’s adjusted taxable income is still taken to account, even if they do not yet quality for their own CSHC. The total combined income as a couple would need to be less than $89,290.

Over the last twelve months, the deeming percentage rates have reduced substantially and I believe there may be people of qualifying age with large account-based pensions who may now be eligible for a CSHC. For example, a couple both of qualifying age with no other investments or income other than their account-based pension income stream would each be entitled to a CSHC even if they had a combined balance of $4 million.

For a healthy person, the CSHC may not seem to offer many concessions, but the difference in prescription prices compared to those who do not have a CSHC can be substantial.

If you are unsure if you are entitled to a CSHC, speak to someone who can look at your circumstances and advise you of your correct entitlement.

 

 

Source:  Mark Teale | Centrepoint Alliance

Account based pensions and the age pension

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Would the rate of Centrelink or Department of Veterans’ Affairs age pension increase if the amount being paid from an account-based pension reduced?

The answer is very much a case of “it depends”. There are several factors that need to be considered:

1. If the full rate of age pension is being paid (i.e. currently $1,423.60 per fortnight, including supplements – for a couple, or $944 per fortnight, including supplements – for a single person), reducing the level of pension payments from an account-based pension will not result in a change to the rate of age pension being paid.

2. If a part age pension is being paid and the age pension is assessed under the assets test, a reduction in the level of income being drawn is unlikely to result in an increase in the rate of age pension.

However, if the account balance of the super pension has reduced as a result of a downturn in investment markets, it is worth informing Centrelink of the new balance as this may result in an increase in the rate of age pension (as a result of the level of assets that exceed the assets test threshold having reduced).

As a guide, the age pension for a couple (combined) reduces by $3.00 per fortnight for each $1,000 of assets that exceed the asset test threshold. The asset test threshold for a couple that own their own home is currently $394,500. Conversely, if the level of excess assets reduces, the age pension for a couple will increase by $3.00 per fortnight for each $1,000 reduction in the excess assets.

It is a fine balancing act and some caution needs to be exercised. A reduction in the level of assets may result in the age pension now being assessed under the income test, rather than the assets test. If this occurs, the following comments will be applicable.

3. For account-based pensions being assessed under the income test, the date the pension commenced to be paid is an important factor.

If the account-based commenced after 31 December 2014, and/or if the age pension commenced to be paid after that date, reducing the amount being paid from the account-based pension will not have any impact on the rate of age pension being paid.

4. However, if the account-based pension, and the age pension have both been continuously paid since before 1 January 2015, reducing the income drawdowns from the account-based pension may result in an increase to the rate of age pension paid by Centrelink.

In these cases, the amount of income counted under the income test is the actual income payable for the financial year, less an amount referred to as the deductible amount.

The deductible amount is calculated when the pension first commences and is based on the opening balance of the account-based pension, divided by the relevant number. The relevant number is the life expectancy of the pensioner, or reversionary pensioner (if nominated – in which case the longer of the two life expectancies is used). Once the deductible amount is established, it remains constant for the life of the account-based pension unless lump sums withdrawals are made, in which case the deductible amount is recalculated.

For example, if a 65-year old male commenced an account-based pension (with no reversionary pensioner being nomination) on 1 December 2014, and the opening account balance was $450,000, the annual deductible amount will be $24,272. ($450,000 ÷ 18.54). This amount will be deducted from the actual income being received from the super pension to determine the amount of income assessable under the income test. Therefore, if the level of income being received from the super pension is greater than the deductible amount, reducing the actual income being drawn will result in an increase in the rate of age pension.

Taking this example one step further, if the income being drawn from the account-based pension was (say) $40,000 per annum, only $15,728 ($40,000 – $24,272) would be counted under the income test.

If the super fund were requested to reduce the annual income payments from $40,000 to (say) $30,000, the amount assessed under the income test would reduce from $15,728 to $5,728. This would result in an increase in the amount of age pension being paid.

Having said that, if the level of income being drawn from an account-based pension is less than the deductible amount, a reduction in the level of income being received would not result in an increase in the rate of age pension being paid as the income received from their account-based pension is not affecting the level of age pension being paid. Likewise, there would be little value in reducing the income from the account-based pension to an amount less than the deductible amount, other than perhaps, to preserve money in the superannuation environment.

Therefore, where a person is receiving less than the full rate of age pension, and their super pension is an account-based pension, a reduction in the amount of income being drawn may result in an increase in the age pension entitlement provided the account-based pension commenced to be paid before 1 January 2015.

If this situation applies, and the super fund is being requested to reduce the level of income payments, it is important to ask the super fund to issue an amended “Details of income stream product form (SA 330)” and for this to be given to Centrelink to enable the reassessment of the age pension to be made.

In summary, and increase in the rate of age pension being paid by Centrelink may increase where:

1. A part age pension is being paid and is being assessed under the assets, and there has been a reduction in the account balance of the account-based pension, or:

2. A part-age pension is being paid under the income test and an account-based pension commenced to be paid before 1 January 2015, and the level of income being drawn from the account-based pension is reduced.

If you have questions about your superannuation or Centrelink and Veterans Affairs’ pensions, speak with a qualified financial planner.

 

Source: Peter Kelly | Centrepoint Alliance

Do we need permission to retire?

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Do we need to seek permission to retire? The answer is “yes”.

If we have a significant other, having them in agreement is probably a smart idea. Retirement is a significant life event and all parties need to be on the same page, committed and in agreement.

Having the agreement of your employer is also very important. After all, we would all like our exit from the workforce to be mutually satisfactory to all concerned. We want to leave on good terms.

Retirement may be forced upon us as a result of ill-health, redundancy, the failure of a business, or the need to take time out to care for unwell or ageing family members. Often, we don’t have a lot of control over such circumstances.

On the other side of the equation, retirement may be driven by the fact we have reached “retirement age” – although there is no longer an official retirement age in Australia, except in some occupations; or we have reached the age where we can access our superannuation or receive the government age pension.

But for others, retirement might result from the fact we are just tired of the day to day grind of getting up and going to work or our work is no longer fulfilling.

For some, retirement simply can’t come quickly enough because we have so many other things we would prefer to be doing. I think they are the lucky ones. They have purpose.

Many people often retire without a sense of purpose. They just fiddle around the house, maybe watch afternoon TV or take the dog for a walk, or head off to a shopping centre, just to fill in time. It is not uncommon for people to feel lost in retirement.

When we have our retirement mapped out and we have plans, we have effectively given ourselves permission to retire. On the other hand, if we simply meander through retirement without purpose, perhaps we haven’t given ourselves that permission.

For many, retirement will consume around 25 years of our life. That is a long time to be living with regrets. If we are not ready for retirement, then we shouldn’t retire. Even if we are unable to continue in our present job, there are options out there.

Some will say that it is difficult for older people to find work, and that is true, however there are many charities that are keen to get all the volunteers they can and there are many employers willing to take on part-time and seasonal workers. Alternatively, take the skill developed over a lifetime of working, and start your own small business or consulting practice, or commercialise a hobby.

When retirement beckons, embrace it with passion and purpose. Have a plan and most importantly, give yourself permission to do whatever it is you want to do, when you want to do it, without any feeling of guilt.

 

Source: Peter Kelly | Centrepoint Alliance