Assets Test changes announced and Government drops proposed indexation change

The Social Services Minister has made two significant announcements and given up on a previously announced change. First the dollar thresholds at which the pension reduces will be increased.  Secondly the rate at which a pension tapers.

Asset Test Changes
From January 2017, it is proposed that the asset test thresholds will be increased to $250,000 (single – homeowner) and to $375,000 (couple – homeowner) with the corresponding non-homeowner rates being increased by $200,000.

The taper rate has been increased from $1.50 per $1,000 of assets to $3 per $1,000 of assets.  This doubling of the taper rate returns the rate to its pre September 2007 rate.

The table below sets out the proposed asset test threshold (and the current thresholds) as well as the cut-off point at which there is no pension entitlement under the Assets Test.

(The cut off points have been calculated using an annual single pension of $20,337 and an annual couple's pension of $30,659).

Note:  (1) the pension cut-off points from January 2017 are estimates based upon the current pension rate.  (2) the Government has previously announced that the dollar thresholds for the asset tests will be frozen for 3 years from 1 January 2017.  Consequently, the proposed dollar thresholds will not be indexed for 3 years.

While the assets test threshold has been increased (possibly increasing the pension for some part pensioners), the doubling of the taper rate will have a material adverse impact.  Some part pensioners may be excluded from the pension.

The Government estimates that 90% of age pensioners (and others receiving similar pensions) will either be better off or not adversely affected.  About 170,000 pensioners will have their pensions materially increased by reason of the increase in the threshold amount.  However, on the downside, the Government estimates that 91,000 individuals currently receiving the pension will lose their pension and about 235,000 will have their pension reduced (by the doubling of the taper rate).

The Government estimates that for single pensioners – they will be better off under the proposed changes if they have less than $289,500 (homeowners) or $537,000 (for non-homeowners) in assets.  For couples, they will be better off under the proposed changes if they have less than $451,000 (homeowners) or $699,000 (non-homeowners) in assets.

Indexation Proposal – dead as a dodo
In last year’s budget the Government announced that the age pension would, in future, be indexed by reference to the CPI index rather than by reference to the Pensioner and Beneficiary Living Cost Index.  The reason the Government proposed this change was that the CPI index increases less rapidly than the Pensioner and Beneficiary Living Cost Index.  

As the change has not been passed by the Senate (the change was included in Social Services and Other Legislation Amendment (2014 Budget Measures No 5) Bill), the Government has decided it is too difficult to obtain support in the Senate for the Bill to pass and so the Government has decided to “drop” the proposal – or as usually expressed - the Government is not now proceeding with the proposal.

What to do?
Age pensioners who are likely to be adversely affected by the asset test changes, particularly those who are currently on part pensions and are likely to lose their pension entitlement may be tempted to reduce their assets by gifts to family and friends.

Unfortunately, the Social Security Act does contain provisions dealing with “gifting” as a means to qualify for the pension.  Broadly the provisions treat the value of gifts above a $10,000 threshold as being retained by the pensioner for a period of 5 years - so the gifting may solve the problem in 5 years’ time.  However simply consuming the assets by lifestyle is far more effective for this purpose.  For the less frivolous, the excess assets can be converted into assets which are not counted for the purposes of the assets test by investing the excess assets in the family home.

For pensioners who will have their pension entitlement reduced to zero by reason of the asset test changes, the Government has announced that they will have guaranteed eligibility entitlement to the Commonwealth Health Seniors Card or the Health Care Card – so that they will continue to be entitled to the same concessional access to pharmaceuticals as given to those on the age pension.