Changes needed to Age Pension

Last week we revealed a little known fact about the Age Pension – and that is, how very unfair the asset test rules are for renters and single renters in particular. We had a lot of media attention following the publication of this Age Pension anomaly. Our team has also had a lot of feedback on how this works. We’ve read your comments and had discussions about whether this inequity needs urgent attention.  

Our conclusion is that yes, the Age Pension rules do need to be altered – urgently – to ensure that all older Australians who apply for the Age Pension are treated equitably. Here’s a brief recap on this issue.

The Age Pension is based upon a two-part means test which incorporates the income test and the assets test. There are limits on the amount of assets you may hold and income you can receive before a full Age Pension entitlement becomes a part Age Pension or no pension at all. 

The key issue is that some assets are treated differently under the different tests as follows:

  • Your home: It is exempt from the assets test and no deeming applies
  • Personal assets and non financial investments:  These are assessed under the assets test but no deeming applies
  • Financial assets such as bank accounts, shares and super:  They are included in both the assets test and income test – due to income being deemed.  It seems a bit like double dipping to me.  

The double dipping on financial assets could inadvertently discourage people from investing in income producing assets. This would be a very poor outcome for many people and not what the policy, or the threshold,  is intended to achieve.  There is a relatively simple fix to this.  

Exempt all assets under the lower asset threshold from both the asset test and also from being deemed for the income test.  

This would mean that renters in particular would get the full advantage of their higher threshold, even when they hold financial assets.  

I’ve focussed on renters in the above point as they in theory enjoy a higher asset threshold but can have this benefit completely negated if they hold financial assets.  They are not the only ones impacted by the various anomalies in the system though.  

We wrote last week about a number of suggestions from the team at Retirement Essentials to improve the system better.  You can check out our suggestions in our budget wishlist.  

Your feedback 

But this debate is bigger than our insights and suggestions. Here’s a roundup of your comments from last week. There is a strong sentiment from homeowners that they, too, are finding things expensive as the costs of maintaining a home continue to escalate.

Graham says that government should look at a retiree’s spending history before assessing their eligibility and pension level:

‘If I decide to drink, gamble, smoke or go overseas for annual holidays and not look towards purchasing a house for my long-term needs, should I be entitled to a more generous pension?

Maybe the Govt rules should look at the spending history of individuals rather than just the current circumstances?’

Frances believes that there is a fundamental choice to be made:

‘I am a self-funded retiree and am definitely NOT jealous that I am not getting a government handout. I am much happier living on my own money and not being accountable especially when it comes to gifting or the deeming rate.

But to get to where I am I did have to do without to put extra money into my super. I also didn’t drink, gamble or smoke. I made the conscious decision that either I lived for today or saved for tomorrow and chose the latter. This was partly due to having seen people struggling financially and not wanting to do the same.’

Peter describes maintaining a home in retirement as hardly a walk in the park:

‘It’s obvious the pension compensation isn’t up to the task. But the consequences for those still paying mortgages while living on the Age Pension isn’t a walk in the park either. And further one can’t just walk away like I believe one can in the USA. Yes many ‘home owners’ might be in a position to be able to sell and possibly move to another place but every move is facing similar price rises. All home ‘owners’ (and I use that term lightly) are faced with increased local and state government taxes (Rates) coupled with increasing house (building) insurances. Not to mention ongoing maintenance costs. None of us are actually looking at ‘fairness’ in this regard.’

Alan points to years of sacrifice necessary to purchase a home:

‘I understand that people renting are at a disadvantage to homeowners. But there are many factors to the equation and it seems simplistic to make direct comparisons. For instance often homeowners have had to make many years of personal sacrifice to become /remain home owners. Owning a home unit involves quite expensive ongoing costs and, at times, high special levies for unseen events. Insurance on houses/ units has become increasingly expensive and sometimes seems exorbitant. Renters have mostly only rent to pay whereas homeowners have expenses coming at them from various directions.

I think the current set up with considerably higher asset allowances for renters vs owners is reasonably equitable as it stands.’

And Roy wonders why the family home is exempt, anyway:

‘We are two teachers who contributed the maximum amount to our pension over many years … now we are non-homeowners leasing a villa in a retirement village with minimal assets and are considered too rich to qualify for a pension due to a combined income just above the threshold, while a mate in the eastern suburbs lives in a house valued at $5 million and qualifies for a full Age Pension. There are many countries that consider a house as part of your assets. why not here? The full value will be passed on to his children with no capital gains. Is this equitable?’

Do you agree?

Please feel free to jump in with your own thoughts. We are always interested in the different ways our members view the many many rules of retirement income.

And if you would like to check your own entitlements quickly and easily, please use our free Age Pension Entitlements Calculator. If a more careful consideration of ways to maximise your entitlements is needed, a consultation with one of our experienced advisers will allow you to canvas all options, with experienced support.