Have you ever wished for a guaranteed income for life? Well if you’re approaching retirement, or if you’re already amongst the converted, that’s simply what you require for survival!
Some people fit into the aged pension category and can be provided with a type of guaranteed income for life, but what about those who narrowly miss out?
How badly do you want the aged pension benefits?
We’ve seen clients practically throwing money away just before retirement, just to be able to qualify for the aged pension benefits.
We would recommend a more measured and conservative approach to achieving the benefits of the pension. If you’d like to discover a more measured approach, it just so happens we’re going to talk about one of those methods in this article.
With careful planning and diligent budgeting your income should last you the rest of your life, but wouldn’t it be nice to have more? Or wouldn’t it just be nice to know that it was going to last! (read more on longevity risk).
What’s more, wouldn’t it be nice to get back some of the taxes that you pay/paid during your working years?!
Generally, people create income during their retirement through two methods; their superannuation income streams and non- superannuation income streams.
We’re sure you’ll be able to guess what superannuation income streams might be, so today we wanted to fill you in on what non- superannuation income streams are and the new opportunity available to you as of 1/7/19.
Before we jump into the deep end, allow us to provide some context on a non- superannuation income stream. Put simply, it’s an income producing asset which doesn’t traditionally sit inside your superannuation. This could include the likes of an annuity.
Annuities are income producing assets for set periods of time. The true definition of an annuity (or a lifetime annuity) is actually said to be an income stream for life in exchange for a lump sum payment.
The way you might look at an annuity within your retirement income (for the purpose of a high level understanding and not strictly speaking) is as if it were a super charged term deposit.
One of the differences between term deposits and annuities is that annuities typically provide higher returns on capital than term deposits and they are typically subject to a lot more rules and complications. For this reason, it is recommended that you speak to a Financial Adviser before going out and making any decisions about annuities.
The innovation (product creation) of annuities are typically issued by large insurers. These insurers often look to provide a higher return on investment to attract investors, pensioners and retirees over cash accounts and term deposits. A bonus for you!
While the added incentives are nice, it makes one wonder, is there extra risk in taking this product up?
There’s actually not. As a result of insurers working with massive sums of money and being required to keep enormous sums of money on hand to pay out claims, the government has required them to be able to fund all payments. This is referred to as a statutory fund.
In the event that APRA deems the policyholders funds may be in jeopardy, a judicial manager may be appointed to take action to ensure that the company continues to function and the policyholders can receive a benefit payment when needed.
So, why have we been talking so much about annuities as a non-superannuation income stream? It’s because recently there have been some legislative changes which can create a real opportunity for those in the sweet spot – those who generally narrowly miss out on aged pension benefits and those who would like to be able to access more of it.
Annuities can feel like a god send for these people.
On July 1st 2019 legislation came into force surrounding incomes and retirement assets for those hovering around the Centrelink assistance levels. For years, retirees that sit just outside the assets and income tests have struggled to find ways to access benefits.
Centrelink calculates a person’s Age Pension entitlement under two means tests – the Income Test and the Assets Test – with the test that provides the least pension being applied.
With the advent of compulsory Super then most people are caught out under the Assets Test.
While it’s not a perfect system, it has been the ‘fairest’ system that Australian policy makers have been able to come up with, until now.
If you’re a couple who own your own home and have above $860,000 in combined assets you will not qualify for the age pension or any benefits. (the figures indicated in the image are sourced from The West Australian – Your Money section).
In the past, if you sat just outside the retirement income and assets test for your category, you were cut off – cold! But if you’re a single home owner with $567,250 in assets, you’re not rich by any means.
For those unfortunate to land on this mark to the dollar or just over, you’re in this category and you’re completely cut off from all government pensioner benefits. Current retirees have suffered from this the most. Superannuation was not a requirement when they worked, so many retirees have retired with the expectation that the government would help them out in retirement. That’s not always the case… If you’re about to retire it’s not always the case either.
Those aged 50 and under have generally experienced compulsory employer superannuation contributions, but anyone above that could have missed out on a great deal.
The Age Pension is quite an inflexible financial system for those on the fringe, but fortunately, change is on the horizon with the alternative of an annuity strategy - some relief at last!
Now, the government has seen the value in providing greater access to those who need it. They also want to allow retirees to have more opportunity to create their own outcomes, invest for themselves and help to lower the risk of longevity (outliving your savings)– that terrifying term we all fear (though living longer is generally a good thing if you ask most people who aren’t concerned about their retirement savings).
The Details of How Annuities Might Benefit You And Your Superannuation Income Streams
If you’re anywhere from a few hundred dollars, all the way up to around ~$100,000 (or more) over the age pension asset limit (not including income test), you could be interested in learning more about annuities.
At this range, you are able to lock away a proportion of your money in an annuity and essentially “hide it” from the government’s asset tests.
For example, let’s say you’re a couple that own their own home; your assets are allowed to be approximately $860,000 combined.
At this level you wouldn’t be eligible for any aged pension entitlements, but you’re still far from well off. After all, $430,000 each over 20 or 30 years isn’t much in the grand scheme of things; especially when ASFA predicts that the average healthcare costs in retirement can be up to $4,700 to $9,400 for a couple per annum. Multiply that over 25 years and your $860,000 balance could be consumed by $235,000 worth of healthcare costs.
The benefit of an annuity is you can creep back into the age pension eligibility and get access to potentially thousands of dollars worth of benefits (healthcare and other) and income.
For the sake of this example, let’s say you’re right on the fringe with $860,000 in combined assets.
With the new legislation, if you placed $200,000 into an annuity, only 60% of this amount is recognised as an asset. Therefore $120,000 will be subject to the assets tests, but $80,000 won’t be.
If you were previously just outside of qualifying, that means your new assets level will be $780,000. Whoever passed this legislation was looking out for you – the retirees on the fringe!
At this rate, you could be eligible for a number of the age pension benefits that we mentioned earlier.
You would also qualify, straight out, for up to $5,600 in additional income. That’s because, for every $10,000 reduction in assets, it’s equivalent to $700 per annum in income. That’s government provided income that you don’t necessarily have to work for or do anything additional to receive. As we mentioned before, that’s without factoring into account potentially thousands of dollars in benefits for now being able to access Age Pension benefits.
Getting an extra $5,600 per year is one way to claw back your tax for a number of hard working years unsupported by a compulsory superannuation system. For more strategies and tips to work on accessing more benefits and income in retirement, please reach out to Tim Luxton (below) via our contact page.