World heavyweight boxing champion, Olympian, ordained minister and successful entrepreneur George Foreman returned to the ring at the age of 45 and knocked out opponent Michael Moorer to win the heavyweight world title back in 1994. When asked why he kept fighting rather than retiring, the boxing champion spoke for millions of people, even if he didn’t know it.
“The question isn’t at what age I want to retire, it’s at what income,” he said prophetically.
For most Australians, they do have the ability, albeit more limited than Mr Foreman, to determine what income they want to retire on. Obviously, the earlier individuals and couples think about the income they want to retire on, the more likely they can do that. But even older Australians can take steps to improve their income – even when already retired.
For most Australians, their retirement income reflects whatever they’ve saved and invested during their working careers, plus anything the government provides via the Age Pension and other tax benefits.
There are also irregular bonuses, normally from governments paid in tough times. For example, in last year’s October Budget, the federal government provided support for age pensioners, reflecting the COVID-19 crisis. They paid $250 in December 2020 and another $250 in March 2021.
Any time the government is providing support payments is a good time for a retiree to check in on his or her financial position. More prudent retirees regularly revisit their income and assets to ensure they are receiving the maximum Age Pension income they’re entitled to.
Financial positions change – as amply demonstrated during the COVID-19 hit in 2020.
Retirees spend money, reducing assets. They might take a holiday or spend money on their homes. And 2020 was a boom year for renovations after the federal government introduced its HomeBuilder package. Older Australians who spent money on their homes might now have reduced asset levels.
Last year, COVID-19 put a dent in the economy and investment earnings, and potentially the size of share portfolios. Holders of the big four bank stocks, for example, will have noticed that not only did income reduce last year due to lower dividend payments, but so too did capital, as the big bank share prices ended the year lower than where they started.
At the same time, as the effects of COVID-19 impacted portfolios, people were still needing money to live. The cost of living across the year didn’t fall. In fact, according to the Australian Bureau of Statistics, it rose.
Prudent retirees, whether they be 66 or 88, need to regularly revisit their financial position to determine whether they are receiving the maximum Age Pension income they are eligible for. The March federal government support payment is a good example. There would be some retirees who would not have been able to access the Age Pension in December 2020, when the first $250 payment was made, but may now be eligible under the assets test.
What are the Age Pension assets and income tests?
Your rate of Age Pension is calculated under both an assets test and an income test. The test resulting in the lowest rate will apply.
Assets test
The level of assessable assets you own are assessed against the assets test thresholds, which vary depending on your home ownership and relationship status. For every $1000 of assets in excess of the lower threshold, your rate of Age Pension reduces by $3 per fortnight, reducing to zero once your assets reach the upper threshold.
Income test
Income from various sources is assessed against the income test thresholds, which vary depending on relationship status. The way income is determined for this test depends on the nature of the income or investment.
For every dollar of income in excess of the lower threshold, your rate of Age Pension generally reduces by $0.50 per fortnight, reducing to zero once your income reaches the upper threshold.
Becoming eligible for a part Age Pension
Changes in financial conditions and situations will have pushed some individuals and couples, no matter what their age, into the Age Pension eligibility threshold. There are also individuals and couples just above the part Age Pension cut-off point who would have fallen into it recently.
The part Age Pension, under the assets test, is generally available to single people, who own a home, with assets worth up to $585,750. For non-homeowners, the figure is $800,250, although the figure could be higher when eligible for Rent Assistance. The full Age Pension kicks in at assets of $268,000 and $482,500 for non-homeowners.
Under the assets test, the Age Pension is generally available to a couple who own their home if their total assets are worth no more than $880,500 – or $1,095,000 if they don’t own a house (this could be higher if they are eligible for Rent Assistance). Assuming a couple don’t have any other assessable income, and assets are subject to deeming (a set of rules the government uses to work out the income created from your financial assets), the full Age Pension is available to couples with assets under $401,500 if they own a house, or $616,000 if they don’t.
Another way to edge under the assets test threshold is to invest part of your savings into a lifetime income stream (such as a lifetime annuity). This may give those receiving a part Age Pension a boost and might enable those who are just above the part Age Pension assets test threshold to qualify for the first time.
Generally speaking, investing in a lifetime annuity may help boost your Age Pension today and help to protect your retirement income from share-market downturns in the future.
Under government legislation, for certain lifetime income streams purchased on or after 1 July 2019, including any lifetime annuity purchased now:
- only 60 per cent of the purchase price of the lifetime income stream until the age of 84, and subject to a minimum of five years, is included under the assets test; and
- only 30 per cent of the purchase price thereafter.
In short, a lifetime annuity could reduce an individual or couple’s assets, as per the government’s assets test, potentially pushing them below the threshold allowing them to receive a part Age Pension. Or for those already receiving a part Age Pension, under the assets test, an annuity could increase the amount of the Age Pension payment.
Revisiting assets and income, and eligibility for the Age Pension, should occur at least annually. The rules are complicated and talking to a financial adviser is a great place to start.
Returning to George Foreman. Now aged 72, he would have no chance of accessing the Age Pension if he were an Australian. According to estimates, the George Foreman Grill, a hugely successful cooking appliance, together with earnings from his boxing career mean Mr Foreman is now worth close to US$300 million. He would undoubtedly fail the assets test.
Do you review your income at least every year?
Jeremy Cooper is Challenger’s chairman of retirement income and focuses on research, public policy issues and thought leadership. Before joining Challenger, he chaired the ‘Cooper Review’ into the superannuation system, and those recommendations have been substantially adopted.
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Disclaimer: Age Pension rates as at 1 January 2021 Age Pension benefits described above will not apply to all individuals. Age Pension outcomes depend on an individual (or couple’s) personal circumstances and may change over time. While lifetime income streams may immediately benefit some Age Pension eligible retirees who are assessed under the assets test, in later years, if assessed under the income test, any ongoing Age Pension benefits may be reduced. Consult your financial adviser about potential impacts on your personal circumstances and whether a lifetime income stream is right for you. The information in this email is provided by Challenger Life Company Limited ABN 44 072 486 938, AFSL 234670 (Challenger Life), general only and has been prepared without taking into account any person’s objectives, financial situation or needs. Because of that, each person should, before acting on any such information, consider its appropriateness, having regard to their objectives, financial situation and needs. Each person should obtain and consider the Target Market Determination (TMD) and Product Disclosure Statement (PDS) before making a decision about whether to acquire or continue to hold the relevant product. A copy of the TMD and PDS can be obtained from your financial adviser, our Investor Services team on 13 35 66, or at www.challenger.com.au
Challenger Life is not an authorised deposit-taking institution for the purpose of the Banking Act 1959 (Cth), and its obligations do not represent deposits or liabilities of an authorised deposit-taking institution in the Challenger Group (Challenger ADI) and no Challenger ADI provides a guarantee or otherwise provides assurance in respect of the obligations of Challenger Life. Accordingly, unless specified otherwise, the performance, the repayment of capital and any particular rate of return on your investments are not guaranteed by any Challenger ADI.
