19 December 2016

Over the past week Australian shares were 0.5% lower. Shares in developed countries were 0.3% lower with the US market down 0.1%. Shares in emerging markets lost 2.4%. The Australian dollar was lower at 73.04 US cents. The 10 year bond yield in Australia was 0.02% higher at 2.83% while in the US, the 10 year bond yield closed the week 0.12% higher at 2.59%. The oil price gained 0.8% to 51.9 US dollars per barrel.

US federal funds rate

Last week the US Federal Reserve raised the target range for the federal funds rate by 0.25% to a range of 0.5% to 0.75%. This was the first change in US official cash rates for the year. Initially this announcement created some market volatility but it doesn’t seem to have created large concerns.

Age Pension rules change

The Age Pension rules change on 1 January 2017, with the main changes to the asset test. The changes will impact Age Pension payments received by some pensioners depending on their retirement wealth. In this weekly note we explain the impact of the changes.

For background, Age Pension entitlements are means tested. The Age Pension is determined by two tests; an asset test and an income test. The actual payment received is the lower amount from the two tests.

What’s changing?
  • The asset test threshold for the full pension is increasing, which means more pensioners are likely to become eligible for the full Age Pension.
  • The taper rate is increasing from $1.50 to $3.00 per fortnight for every $1,000 of assets over and above the asset test threshold. This means Age Pension payments will reduce faster as your wealth increases. As a result, the asset test threshold for a part pension decreases.

Figure 1 below plots the Age Pension under the current and new rules for a pensioner couple with a home with different levels of wealth. Our calculations include both the asset test and the income test and capture deemed income on an account based pension.

Graph 1 Source: Mine Wealth + Wellbeing

We can see that the new rules adversely impact the benefits received by wealthier households. If your retirement assets are worth less than $271,200, the new Age Pension rules won’t have any impact on your entitlement. You’ll be entitled to the full Age Pension which is $34,382 pa as at 14 November 2016.

Figure 2 below shows the difference in entitlements resulting from the changes.

  • If your assets are lower than $314,500, the new Age Pension rules won’t impact your pension.
  • If your assets are between $314,500 and $453,500 your entitlement will be larger under the new rule by as much as $1,996 pa. This is the only group benefiting from the new rules.
  • If you have more than $453,500 in assets, you’ll receive less Age Pension under the new rules.
  • If your assets sit between $815,800 and $1,178,100, your pension will fall to zero.
  • The largest reduction in pension is $14,130 pa which happens when your assets are $815,800. This is the asset level at which the Age Pension drops to zero under the new rule.
  • If your assets are higher than $1,178,100, you won’t be impacted as your assets are too high to receive the Age Pension under either rule.

Graph 2 Source: Mine Wealth + Wellbeing

In summary, a small number of pensioners with low to middle asset values will benefit from the new rules. Pensioners with significant assets could either receive reduced payments or lose their pension altogether.

The figures in the illustrations above are only basic examples calculated for pensioner couples with a home who invest all their retirement assets in an account based pension. If these assumptions don't match your circumstances, for example you don’t have a spouse or you invest in other retirement products such as life annuities, your Age Pension entitlements will be different from what is shown here. The impact of the rule changes will be different as well.

Please talk to a financial adviser, for example an adviser from Mine Wealth + Wellbeing Financial Advice1, to find out more about how the new rules will affect you.

This is our last Weekly Update for the year. The Investment team would like to wish you all the best for the festive season and the year ahead.
Signing off
David Bell 

Past performance isn't necessarily an indicator of future performance.
All data sourced from Bloomberg and Centrelink.
‚Äč1Advice is provided by Mine Wealth and Wellbeing Services Pty Ltd ABN 49 051 315 014 a Corporate Authorised Representative of Adviser Network Pty Ltd ABN 25 056 310 699 AFSL 232729.