Part 17 – Retirement planning

There is no mandatory retirement age in Australia, however conventionally the retirement age for men is 65 and for women is 60, derived from the old age pension start dates. However, the baby boomers are doing things differently and recent research from Adelaide’s University’s Australian Population and Migration Centre suggests as many as 74% of people age between 50 and 65 intend to keep working after age 65, even if this is on a part time basis.

Notwithstanding these good intentions, the time that most people call it quits tends to be earlier, and is strongly influenced by two critical qualifying ages. These are:

  • the super preservation age, i.e. the age at which super can be accessed; and
  • the old age pension qualifying age.

Changing demographics change the retirement planning rules

Most of us know that the Australian population is ageing, and faces a worsening ratio of employed persons to retired persons. One writer has recently observed:

It is possible that we can reconceptualise retirement from a binary ‘work/non-work’ condition to a staged process. This is beneficial for the individual and for society. It allows that individual to boost their personal retirement savings. It postpones the time at which the individual draws down fully on the aged pension, therefore meaning less strain on public resources. There are also less tangible, less measurable benefits, for example, the value to an individual of the social networks of a workplace or the sense of purpose that goes along with ‘going to work’.

– Drum. Emily Millane 22 November 2013

Superannuation preservation age

A client who has reached preservation age and stopped working can access their super as a lump sum, subject to taxation.

At age 65 super benefits can be accessed tax-free without stopping work. Preservation age depends of your date of birth and the position is tabulated here:

Date of Birth Preservation Age
Before 1 July 1960 55
1 July 1960 – 30 June 1961 56
1 July 1961 – 30 June 1962 57
1 July 1962 – 30 June 1963 58
1 July 1963 – 30 June 1964 59
From 1 July 1964 60

For example, Mrs Jane Smith is a financial adviser born on 4 May 1957. She has just stopped working and does not intend to work again. Mrs Smith is over her preservation age of 55 and can access her super benefits as a lump sum without restrictions (but will face a tax charge unless she waits until she is age 60).

Mrs Smith could instead consider a transition to retirement pension, i.e. a pension able to be paid after the preservation age without stopping work, rather than a lump sum. She can access as much as 10% of her super benefits each year. The amount is taxed until she is age 60: most clients would not start a transition to retirement pension until age 60 for this reason. (And most clients will start a transition to retirement pension at age 60, since doing so means the super benefits are not taxed at all.)

When should clients retire

Thirty years ago the magic age for retiring was 65 for men and 60 for women.

These dates were based on the age when men became eligible for the old pension in 1908: this was the average lifespan at that time, and if you lived that long you got a basic government pension to sustain you until you finally dropped off the perch. It was not a luxurious lifestyle and for most it was pretty short as well.

Things have changed dramatically in the last thirty years. The 2014 Federal Government Budget sums it up: strong and controversial measures to limit the amount of the old age pension and the number of people eligible for it, with the rate of growth cut back and the eligible age progressively increased to age 75 at 2030.

People are generally living longer, and many people, particularly women, will spend thirty years or more in retirement. Most people age 50 and above are concerned about their retirement. When will it start? What will it involve? What will their income be? How will they pay their bills? Will they be able to help their children? Will they leave a financial legacy? Will they have enough to live on?

The best advice to most clients it to keep working for as long as they can, and perhaps look at scaling down to part time work.

Client’s should talk to their employers about how these goals can be achieved, and what they need to do now, or soon to meet their expectations for mid-sixties and beyond employees, and what role they see your client developing into. Sometimes common sense says your clients should take a step back, not a step forward, perhaps moving to a less demanding position, a less public position or a less time consuming position. Increase work from home and/or an increased mentoring role may make sense. As your client’s financial planner, you should explore these ideas with your client to map out a sensible strategy for their future employment plans and eventual retirement.

The considerations should be pragmatic, it’s not just about the income. Consider your client’s psychological and social health, which are very much connected to their desire to contribute and not as you say “be a drain on society”.

On the money side, however, the effect of continuing to work an extra ten years will be profound. There are at least three positive effects. These are:

  • Your client will continue to add to their stock of capital, principally through on-going super contributions and continued growth in asset values;
  • Your client will not draw down their capital for a further ten years; and
  • Your client will need to rely on their wealth as a retiree for ten less years.

In summary, if your client’s are good at what they do, their job gets them out of the house, they enjoy what they do, their work has a positive social and psychological benefit and their overall financial outlook will be improved, delaying retirement for as long as possible should be a strategy that is discussed and put in a statement of advice.

Reverse mortgages

Another option which can assist financing retirement is using a reverse mortgage for clients who are asset rich but income poor. This type of mortgage allows clients to access the equity in their homes through a lump sum, which can be used to supplement income to cover lifestyle needs.

The Australian Master Financial Planning Guide 2015/16 (Wolters Kluwer CCH) highlights the following advantages and disadvantages:

Advantages

  • Provides additional income in retirement;
  • Client’s can continue to live in the family home; and
  • Repayment of the loan is deferred.

Disadvantages

  • Compounding interest will see the loan rapidly increase over time;
  • It has established fees and ongoing maintenance fees;
  • There will be a lower level of assets to leave for the beneficiaries of the client’s estate;
  • The amount of the loan could potentially exceed the value of the home (unless a “no negative equity” guarantee is made).

Reverse mortgages have an undeservedly bad reputation. Unfortunately unscrupulous spruikers have grabbed the concept and ripped off vulnerable old folks, charging ridiculously high fees and interest rates, and borrowing far too much and even losing their homes.

Used sensibly reverse mortgages can be powerful financial planning tools and can maximise a retirees’ quality of life and reduce financial stress on the younger generation.

A practical example

Client Sam has three siblings, and his parents’ will, quite rightly, divides things four ways. His parents are pensioners, and own a home worth about $800,000, and not much else.

Sam and each of his siblings will inherit $200,000 when their parents pass away.

Sam was annoyed that his impecunious parents always looked to him for financial support.

He shelled out for a new car, a trip to the UK to visit a daughter (Sam’s sister) every two years, house repairs and some large payments like health insurance, water rates and so on. It was costing about $20,000 a year. Sam did not begrudge his parents this support, but thought it was unfair that his siblings did not chip in. They said he was the well-paid child so he could well pay for the parents.

Two solutions presented. The first was to ask the parents to sign a loan agreement covering past payments and all future payments so Sam could get his money back, plus a little bit of interest, out of his parents’ estate. This meant ultimately his siblings were paying one quarter each, which Sam thought fair. But Sam felt uncomfortable asking his parents to sign a loan agreement, and his parents felt uncomfortable having to ask for money.

The better solution was for Sam to arrange a loan for his parents, secured against their home, and guaranteed by Sam, at normal home loan rates (about 5%). Sam then arranged for an automatic transfer of $5,000 a quarter to his mum and dad’s bank account. They got their dignity and they got their cash. They now get $30,000 a year from the pension, and $20,000 a year from the reverse mortgage. They have $50,000 a year and is more than enough to enjoy life and pay for economy air fares to the UK and return every two years.

If their home goes up by 3% a year they get a $24,000 a year tax free capital gain. They are only drawing $20,000 a year, so their net equity position should remain safe. There is really no risk because obviously if things went pear shaped, and interest rates jumped up and property values fell, Sam would bail his parents out. He has guaranteed the loan anyway.

The reverse mortgage achieves a better balance between material living standards now and inheritances to children. They can work for clients who otherwise would be subsidising all their parents’ living costs, and they can also work for client who have no children and no other significant assets.

ASIC’s view

ASIC has had some bad experiences with reverse mortgages and warns the risks include:

  • Interest rates are generally higher than average home loans;
  • The debt can rise quickly as the interest compounds over the term of the loan – this is the effect of compound interest and is something you need to be aware of before making any decisions;
  • The loan may affect your pension eligibility;
  • You may not have enough money left for aged care or other future needs;
  • If you are the sole owner of the property and someone lives with you, that person may not be able to stay when you die (in some circumstances);
  • If you fix your interest rate then the costs to break your agreement can be very high.

ASIC through MoneySmart has produced a useful publication called “Thinking of using the equity in your home? An independent guide to using equity in your home. This provides a simple and easy to follow guide on what factors should be considered and some case studies of the practical implications of utilizing a reverse mortgage.

The MoneySmart website also has a calculator which can be accessed here: MoneySmart Reverse mortgage calculator, which can help map out how much the debt will increase over time and how it effects the equity in the home. It can also map out how changes in the interest rates and house prices can affect the equity in a home. The calculator is a good starting point to see if the reverse mortgage is a viable option for the client.

An alternative to reverse mortgages

One aspect of reverse mortgages that can put some people off is the potential for interest on the loan to compound to such an extent that the client is forced to sell the home. When the amount drawn is prudent, the likelihood of this occurring is low. But this point is sometimes lost on clients and their anxiety about the interest ‘getting away from them’ needs to be taken into consideration.

One potential alternative is a ‘home reversion’ product, offered by Homesafe Solutions, a part of the Bendigo Bank, involves a client being paid a lump sum up to 50% of the value of their home. This money can be used to fund their day-to-day living costs and allows clients to continue living in their home.

The Homesafe Solution is described on its website as:

  • the client sells a percentage of the future sale proceeds of their home (maximum of 50%) in return for an immediate lump sum cash payment.
  • the client continues to live in the home until they die or decide to sell. They make no payments, pay no rent and have control over the property.
  • On the sale of the property, the client (or their estate) pays Homesafe its fixed percentage of sale proceeds and retains the balance.

Simply put, this strategy involves the client selling a portion of their home to Homesafe now. The client and Homesafe become co-owners (although this is achieved without Homesafe becoming a registered owner on the property title). When the home is later sold, or the client dies, then Homesafe receive their portion of the proceeds from the sale of the house. Because Homesafe take an ownership interest in the property, there is no compounding of the amount that the client owes to the Bank.

Obviously, the Bank needs and wants to make a profit. They do this by making a capital gain on the amount provided to the homeowner. This capital gain is achieved in at least two ways. Firstly, Homesafe enjoy proportional access to the increase in the capital value of the property. Secondly, the proportion of ownership taken on by Homesafe is calculated on a valuation provided to the Bank by a Bank Panel valuer. These valuations are typically conservative, which is to say they typically under-estimate the value of the property that would be achieved if the property was sold on the open market. This means that the amount forwarded by the Bank is held to represent a larger share of the actual value of the property than it seems to based on the valuation.

For example, if the Bank forwards $100,000 to the owner based on a valuation of $500,000, the Bank will take a 20% ownership interest. But if the property is actually worth $550,000 on the open market, then the 20% interest to which the Bank has become entitled is actually worth $110,000.

One way to ensure that not too much is lost in this way is for the owner to obtain their own independent valuation before deciding whether to use Homesafe. Homesafe will not accept this valuation as it is not a bank panel valuation. Homesafe will base the contract on its own valuation. But the owner can compare the two to decide whether Homesafe’s valuation is accurate.

Social security benefits

Some clients will not have enough super and investments to be able to meet their financial needs and objectives in retirement. Social security benefits will come into play when a client’s assets have depleted or they have failed to accumulate any significant asset base over the years. ASIC estimates that up to 65% of older Australians rely on some sort of government support through the form of an allowance or pension to meet their lifestyle needs.

Most need it to live, i.e. they rely on the pension to buy food and other life necessities. Old age can be bleak. It’s particularly bleak, and particularly stressful, if you do not own a home and do not have somewhere secure to live.

Others do not need it to live. It’s a bonus, something used to fund extra life luxuries. Assets tests and income tests apply, but it is still possible to receive a part pension with $500,000 of assets plus a family home. Millionaires get the pension too.

Social security

‘Social security’ is the term used to describe the range of government assistance programs available to members of the Australian community. In terms of financial planning, social security typically refers to direct payments made by the main Australian government bureau responsible for social security Centrelink. Each quarter, Centrelink releases the ‘Guide to Australian Government payments’. This guide details the various payments to which a person may be entitled. It is revised each July, October, January and April, at which time changes in payment rates are incorporated into the various tables within the guide.

Additionally, the Government publishes a Guide to Social Security Law. This contains more legal discussion about social security payments, as well as the various rates of payment available to recipients. One feature of this guide is that it publishes both the current and historical rates of benefit. It also discusses the ways that social security benefits may or may not be taxed, and provides information about the various social security agreements that Australia has with other countries. These international agreements concern people who may have a social security entitlement from more than one country. According to figures from the 2011 Census conducted by the Australian Bureau of Statistics, almost 26% of people residing in Australia were born overseas.

In addition to Centrelink, other useful sources of further information include:

Role of social security benefits in the financial planning process

Basically social security benefits provide a safety net for people who have retired or cannot work and are unable to support themselves, or have not been able to accumulate substantial assets for retirement. Self-funded retirees may also seek some assistance through fringe benefits or to supplement their retirement income.

Financial advisers can employ a range of strategies to legally maximise available benefits or to help people qualify for benefits that they did not think they were eligible for. You can read about some of these in Chapter 6 of the Australian Master Financial Planning Guide 18th Edition 2015/16 which provides a useful overview of the range of benefits associated with Centrelink and the Department of Veteran Affairs. Section 6-540 onwards provides information on income test and asset test strategies, tips and traps. Sections earlier in the chapter deal with retirement housing, assessment of investments. Section 6-310 provides information on the taxation of social security benefits.

Advisers need to understand the social security legislative framework and to keep up to date on legislative developments and change to ensure that their clients are not financially disadvantaged. The first step is to ascertain a client’s entitlement to a benefit. Once eligibility has been established, the next step would be to determine if means testing (assets and income) would preclude the client from receiving a benefit. Some types of assessments may be assessed differently under the means test, and the results of means testing may result in a delayed eligibility for the benefit.

Some of the more recent changes that advisers would need to take into account include:

  • Account-based income stream balances will be deemed for income test purposes as from 1/1/15;
  • Major reforms in the Aged Care sector including new rules for accommodation payments and ongoing care fees;
  • Australian working life residence changes;
  • Proposals to increase the Age Pension age to 70 by 2035;
  • Increasing eligibility age for Newstart and Sickness Allowances;
  • Disability support pension changes.

Types of benefits available to clients

A benefit is a payment made to clients. The main benefits available in Australia are:

  1. unemployment benefits (Newstart);
  2. benefits to parents caring for children (Family Tax Benefit);
  3. disabled persons payments (Disability Support Pension);
  4. benefits for carers of disabled persons (Carer Allowance and Carer Payment); and
  5. benefits for aged clients (Aged Pension).

Means and income testing

Most benefits in Australia are means tested. The word ‘means’ refers to a person’s ability to support themselves financially. The means test assesses whether a person has the financial means to support themselves without receiving social security benefits. The philosophy underpinning the means test is that if an individual can support themselves without government assistance, then they should do so.

Social security pensions, allowances and benefits are subject to means tests to ensure that benefits are only paid to people actually needing them. Each means test has a threshold level and a cut-off level. You can find details of these in Chapter 6 of the Australian Master Financial Planning Guide (18th edition), Section 6-500. Pensions are subject to both an income and assets test. Special rules apply to the assessment of certain investments (refer to Section 6-580) and income streams (refer to Section 6-640).

Assessment of investments

Financial planners should pay particular attention to a number of assessment rules as follows:

  • deeming provisions concerning financial assets (Section 6-600);
  • treatment of super (Section 6-610);
  • treatment of private trusts and companies (Section 6-620);
  • treatment of income streams (Section 6-640);
  • treatment of property investments (Section 6-660);
  • treatment of reverse mortgages (Section 6-660).

The age pension

The age pension provides income support and access to a range of concessions for eligible Australians over the age of 65. The maximum single pension (excluding the pension and energy supplement) is $788.40 per fortnight or $20,498.40 a year. For couples the maximum pension is $1,188.60 per fortnight, or $30,903.60 a year. For a complete list of pension rates, refer to: Department of Human Services – Payment rates for Age Pension.

There are a number of requirements that need to be met before an entitlement to the age pension will occur.

Residence requirement

To meet the residence requirements on the date of claim you must be:

  1. an Australian resident;
  2. physically present in Australia;
  3. have been an Australian resident for a continuous period of at least 10 years, or a number of periods that total more than 10 years, with one of the periods being at least 5 years.

You may also be eligible for the age pension, despite not meeting the 10 year requirement, if you:

  • are a refugee or former refugee; or
  • were getting partner allowance, widow allowance or widow B pension immediately before turning age pension age; or
  • are a woman whose partner died while you were both Australian residents, and you have been an Australian resident for 2 years immediately before claiming age pension.

Age requirement

To determine whether your client qualifies for the age pension, they must meet their qualifying age, based on their date of birth. The pension age is 65 for men and women. It used to be 60 for women, but it was increased to 65 some years ago as a gender equality measure. The Federal Government’s May budget announced that the pension age will ultimately increase to 70 by the year 2035, subject to transitional rules.

The relevant dates are as follows:

Date of Birth Eligible Age
1 July 1952 to 31 December 1953 65.5
1 January 1954 to 30 June 1955 66
1 July 1955 to 31 December 1956 66.5
1 January 1957 to 30 June 1958 67
1 July 1958 to 31 December 1959 67.5
1 January 1960 to 30 June 1961 68
1 July 1961 to 31 December 1962 68.5
1 January 1963 to 30 June 1964 69
1 July 1964 to 31 December 1965 69.5
1 January 1966 and later 70

So a client born on 4 May 1961, (i.e. between 1 January 1961 and 31 December 1961) will not qualify for the old age pension until age 68.

Income and Assets tests

The amount of pension that your client will be entitled to is determined by the income and assets tests. Both tests will be assessed and the test that produces the lowest rate (or nil rate) will apply. The information below is an overview of the current rates to meet these tests which will be applicable for most clients. You should check the up to date tests on the Department of Human Services website as well as any special rates and terms for clients with particular circumstances.

Income test

Your client’s actual or deemed income will be factored in when determining the amount (if any) of the benefit your client will be entitled to. Financial assets held will be deemed to earn an income, even if there is no actual income received from these assets. There is a minimum amount of income that your client can receive before your entitlement to the pension will reduce.

Deeming income

From 1 July 2015 the deeming rate for single pensioners is 1.75% per annum for the first $48,600 of your financial assets, and any amount over that will have a deeming rate of 3.25% per annum.

For couples, where one of the couples receives a pension, the first $80,600 of the couples combined financial assets has a deeming rate of 1.75% per annum, and any amount over that will have a deeming rate of 3.25% per annum. For couples who do not receive any pension at all, the first $40,300 for the couples jointly owned financial assets are deemed to earn an income at 1.75% per annum and any amount over that is deemed to earn an income at 3.25% per annum.

If your client’s actual income that they receive from the financial asset is more than the deemed income using the above rates, the extra income is not included when their pension entitlement is assessed. The deemed income is added to any income your client may have from other sources, such as income from employment. The total income is used to work out how much pension they will be entitled to.

Financial assets that will have deemed income include the following:

  • Cash;
  • Term deposits;
  • Cheque accounts;
  • Bonds;
  • Managed funds;
  • Investments in super (where the owner is over the age pension age or age service pension age);
  • Listed shares and securities;
  • Loans;
  • Gifted assets over $10,000 (per financial year, or $30,000 for a 5 year period);
  • Bullion;
  • Short term income streams;
  • Account based income streams from 1 January 2015.

Financial assets which are not included:

  • The home;
  • Home contents;
  • Cars;
  • Boats;
  • Coin and stamp collections;
  • Investments in super funds where the owner is under the age pension age or the age service pension age;
  • Life insurance policies;
  • Holiday houses;
  • Farms;
  • Grandfathered income streams.

There is an exemption from meeting the income test if you are permanently blind and you get the age pension, or disability support pension and you do not receive rent assistance.

Income thresholds and cut-off rates

Currently, the lower income threshold is $162 per fortnight for single pensioners and $288 per fortnight for couples. When your client has income which exceed the lower income threshold, the pension will reduce by 50 cents in the dollar for a single pensioner, and 25 cents in the dollar for each member of a couple.

When your client’s income exceeds the cut-off point, their entitlement to the pension will reduce to $0. The cut-off amount for single pensioner is $1,896.00 per fortnight and $2,902 per fortnight for couples.

Assets test

Your client’s entitlement to the pension will reduce, when they hold assets over a particular limit. These limits are regularly updated four times a year and are available here: Department of Human Services – Asset test limits. Under this test, when your client owns assessable assets with a value in excess of the limits, the amount of the pension payable is reduced.

The current rates (as at 1 July 2015) are as follows:

Assets test threshold for full pension
Family situation Homeowners Non-homeowners
Single – Full pension $205,500 $354,500
Couple – Full pension $291,500 $440,500
Assets test threshold for part pensions
Family situation Homeowners Non-homeowners
Single – Full pension $783,500 $932,500
Couple – Full pension $1,163,000 $1,312,000

Assets that are over these amounts will reduce your client’s pension entitlement by $1.50 per fortnight for every $1000 above the limit.

Further changes have been legislated and due to commence on 1 July 2017. These changes include:

  • Increase to the assets free areas for both homeowners and non-homeowners;
  • Increase to the asset test taper for the pension asset test from $1.50 per fortnight to $3.00 per fortnight per $1,000 of assets over the lower threshold.

Under the proposed changes to the assets test the government estimates that 12% of pensioners will lose their pension entitlement. To compensate for this loss for those who are pension age and over they will be issued a Commonwealth Seniors Health Card. For those under pension age they will be issued a Health Care Card.

Financial assets

Generally any form of property owned by your client will be considered an asset for the purposes of the assets test, unless it has been specifically excluded.

Assets that are generally included (but not limited to) in these calculations are assets such as:

  • Motor vehicles;
  • Household contents and personal effects;
  • Boats and caravans;
  • Licenses (fishing or taxi);
  • Surrender value of life insurance policies;
  • Real estate (excluding the family home);
  • Superannuation (if over age pension age);
  • Business assets;
  • Savings and cash.

Assets that are generally exempt from the assets test include:

  • The family home;
  • Superannuation (if under pension age);
  • Contingent, remainder, or reversionary interests;
  • An interest in an estate which has not be realised yet;
  • Aids for disabled persons;
  • Native title rights and interests;
  • Lump sum accommodation bonds for aged care;
  • Funeral bonds that cost up to $12,250 (need to factor in lump sum plus any other additional payments.

If your client is receiving other forms of benefits such as rent assistance the limits may increase. Different rates may also apply for couples who are separated due to illness or if only one partner of a couple is eligible for the pension.

When providing advice to clients on whether they meet the assets and income tests, financial planners should always double check the latest rates and qualifying information with the Centrelink directly. The Centrelink website is a great place to find out more about pensions and other forms of social welfare. It’s free, informative and work a look if you are concerned about old age pensions and simular entitlements. The staff are caring, confidential and discrete, and treat all clients with dignity and respect.

Seniors card

If a client is not entitled to receive the age pension due as their income or assets are over the maximum allowable threshold, they may still be eligible for the Seniors card.

The Commonwealth Seniors Health Card provides older Australians with access to cheaper prescription medicines, Australian government funded medical services and other government concessions. They may also get discounts or concessions on:

  • Bulk billed doctor’s appointments;
  • Cheaper out of hospital medical expenses through the Medicare Safety Net;
  • Concessional rail travel (eg The Ghan, The Indian Pacific and The Overland);
  • Extra health, household, transport, education and recreation concessions that are offered by state, territory or local governments and private businesses.

To be eligible for this card, your client must have reached age pension age but do not qualify for the pension and meet an income test and residence requirements.

Income test

The income test for this card is indexed each year and includes adjusted taxable income and a deemed amount from account based income streams.

To meet the current income test, annual income must be less than:

  • $52,273 for singles;
  • $83,636 for couples combined;
  • $104,546 for couples combined where the couple is separated by illness, respite car or where one partner is in prison.

There is no assets test for this card. If your client has any dependent children, the income limit is increased by $639.60 for each dependent child cared for.

These are the current rates. You should check the latest rates in the Centrelink website as they are indexed every year in September.

Strategies

There are many strategies that financial advisers can use to legitimately maximise their client’s social security benefits. A tax-free pension of $30,000, effectively secured by the government, indexed by inflation, and payable for life with a reversion to a single pension of $20,000 a year on the death of one partner, is like an annuity or private pension, and has an equivalent economic value.

This value may range from $400,000 to $600,000 depending on health and age: remember, many women will live into their nineties and spend thirty years or more as pensioners. Planning for the old age pension can make sense in cases where the client’s assets are light and other sources of income not reliable (for example, due to poor health or a disability).

Planning techniques include:

  • Deferring retirement as long as possible, building up more assets and reducing the need for the old age pension;
  • Genuinely gifting assets to children or uncontrolled trusts more than five years before the start of the old age pension; and
  • Reverse mortgages, as discussed above, can make a lot of sense, allowing the client to access the equity in their home.

For example, consider a client has several investment properties and a net worth of say $1,400,000, who would generally not meet the assets or income test. A potential strategy could be to purchase a new home and use a reverse mortgage. In summary, the strategy could involve either of the following:

  1. A new home/reverse mortgage strategy involving:
    1. selling all investments and the home and investing everything, except say $200,000, in a new home, perhaps something by the water with a view, with a value of say $1,200,000 in today’s dollars;
    2. becoming eligible for the single person’s pension plus various other concessions;
    3. investing the $200,000 in high yield bank shares with franking credits (say 7% after credits and tax, or $14,000 cash a year); and
    4. arranging for a reverse mortgage of say $33,000 a year (ie 3% of value a year) to be paid to you as a tax free borrowing, and therefore derive a possible net cash flow, free of tax, of $67,498.40 a year ($33,000 + $14,000 + full pension of $20,498.40) plus the benefit of a tax free capital gain on a $1,200,000 family home; or
  2. Settling/gifting your assets other than your home and $200,000 cash on a trust for the benefit of your children or nephews and nieces, more than five years before you claim an old age pension.

The effect of the first strategy to sell investments and upgrade the family home means that your client will:

  • move their wealth from their investment properties to their home, making the assets exempt from consideration in the assets test;
  • provide an income stream from a portfolio of blue chips shares, which is under the income cap and assets threshold;
  • provide an income stream (to compensate the loss of rental income) through the reverse mortgage; and therefore
  • entitle the client to the age pension that they would have otherwise not been entitled to.

The effect of the second strategy to gifting assets to children or other relatives means:

  • the assets gifted won’t be included in the assets or income tests because they were gifted outside of the 5 years period (see gifting rules);
  • the family home will remain excluded from the assets test;
  • the client will be able to meet the assets and income test and be entitled to the pension that they would have otherwise not been entitled to.

Note that some of these transactions may trigger capital gains and transaction liabilities such as stamp duty. As the financial planner, you should consider whether the value of the pension entitlement is worth incurring the extra costs associated with implementing the strategy.

The Dover Group