The full aged pension in Australia, with all entitlements, is currently worth $867 per fortnight. This equates to $22,542 per annum. To use a very simple point of comparison, the current annual return on a 12 month term deposit with the NAB is 2.4%. A client would need a deposit worth almost $940,000 to generate a guaranteed return of $22,542 per year.
Therefore, one way to look at it is that the existence of the aged pension constitutes a safety net for every Australian aged over 65 – and that safety net is worth about $1 million.
Despite this, we frequently see recommendations for clients that go to unusual – and unnecessary – lengths to ‘preserve’ non-home assets such as cash. The most frequent of these is perhaps an annuity, which is purchased with the view to providing a long term income stream for the client. The annuity is typically purchased to ‘guard’ against the risk that a client’s wealth will not last as long as they do. The concern is that, without the annuity, the client will expend or somehow lose the wealth and thus be left bereft in their final years. This a scary prospect for most people.
In this way, the annuity is seen as a safety net. On first glance, this seems fair enough. But given the existence and availability of Centrelink, such a safety net is often an unnecessarily-conservative use of a client’s money.
The annuity can even compromise eligibility for the aged pension via one or both of the assets and the income test. This effect needs to be ‘netted off’ against the benefits of the annuity, especially when the annuity is compared to other ways of holding assets.
As we explain in one of our Friday Reflections, annuities can at times effectively privatise the old aged pension: the client replaces their Centrelink entitlements with a private arrangement.
The existence of Centrelink benefits is a factor to consider when deciding on the risk profile of any client who would be Centrelink eligible. While we are not recommending that every client of eligible age have an asset called “Centrelink” and valued at $1 million added to their net assets, with their risk profile adjusted accordingly, we do suggest that any assessment of a client as being highly conservative be considered in the light of what Centrelink has to offer.