It’s all a matter of perspective

What you see – or don’t …

… can cost you dearly

A diptych is a double image that shows two different things simultaneously. The example in the image above is very famous. It was first published in a German postcard in 1888 and then reshared by an Englishman, who named it ‘My wife and my mother-in-law’. Co-existing within this simple sketch are two women – one much younger than the other. Psychologists say that whichever image you see first is affected by how old you are.

Whether this is true or not, it’s a useful way of understanding how the human brain can see very different ‘truths’ – some can see only one, others can see both at the same time.

This concept translates to the world of retirement income rather neatly.

What you see may not be the whole picture. It may be correct, but there may be another way of viewing the same set of facts and coming up with a very different financial scenario.

Today we are highlighting five different instances where incomplete perceptions of a financial ‘truth’ can lead to a lost opportunity.

We’d love you to share any ways in which this may have happened to you, too. We’re all fallible, so sharing mistakes or misconceptions is a great way to learn from each other.

The value of your home contents

In a recent case study of Susan and how she had misunderstood the assets test, we shared her listed assets as $10,000 for home contents.

One of our eagle-eyed members was somewhat astounded that this valuation could be so low.

And he is right.

Replacement costs on household items are higher than ever. So what’s going on here?

Says Adrian:

$10,000 for contents? Seriously?
When last I did (a check) , it was somewhere north of $100,000 and that is years ago.

All must be insured for replacement value, even if you can’t sell them for that. If not, the insurance, if you ever need it, may not be enough to replace your contents.
Something to think about with all these floods and bushfires.

Adrian has a valid point of view when it comes to insurance.

But there’s another view.  James notes:

Adrian is correct that the replacement value for many people’s home contents would be well in excess of $10,000. Centrelink, however, is interested in the money you would get if forced to sell some personal assets to access quick cash. For this reason it is the garage sale value that is most relevant. People who value their assets at the higher replacement value for Centrelink purposes often just end up costing themselves money in terms of reduced entitlements. It is quite legitimate to value your assets at the higher replacement value for insurance purposes and the lower garage sale value for Centrelink.

When debt can be claimed and when it can’t

Just because you are retired, doesn’t mean you have retired from selling or buying a house. But you need to know all the rules before you decide what you will use as equity when you sign up for a loan. There are two ways of viewing your loan when you are purchasing an investment property – and it all depends on how the mortgage is established. On the face of it, you can deduct the loan from the asset. But not always.

Recently Noel asked us:

“I am 66 and have two houses. My mortgage is on the investment property
Will this affect my pension application?”

Our answer was, it depends:

The equity in an investment property will be included in the Age Pension assets test. Having a mortgage against the investment property reduces the equity and therefore the assessable assets which is good from an Age Pension entitlements perspective. There may of course be lots of other considerations. If, on the other hand, the mortgage is against your home, then the entire value of the investment property will be included in the assets test. Talk to an Adviser if you want to know more.

The value of your (non-deemed) car

We’ve covered the rules on car valuations a few times, but it continues to be a topic of great interest for our members, many of whom who are missing out on Age Pension entitlement by just a few dollars. The way most of us view the value of our cars is close to the price we paid for them, or at the price we believe it would cost us to replace them. Still others will value their car at the amount for which it is insured. But all of these amounts are illusory when it comes to how Centrelink views your car. We ran a check on one of our friend’s cars – a 2012 VW Golf TDI. It was purchased as a ‘demo’ model for about $30,000 early in 2013. It is currently insured for $10,400 only. A quick glance at www.carsguide.com.au shows us it now has a lower end valuation of  $6990. It is fair to use this estimate of $6990 depending, upon the condition of the car. So our team member’s guess that it was worth about $15,000 was way off the mark. Her view did not coincide with the reality of valuation needed by Centrelink. If she had been applying for an Age Pension this different perspective could have cost her $3,000 or more in entitlements. Here’s how.

Self-funded and concerned about suddenly running out of money

The view that those who are self-funded in retirement are living the life of Riley (whoever he is or was), is simply wrong. In 2017 major changes to assets thresholds moved 300,000 Australians off the Age Pension. These retirees do not qualify for a pension but are living on a relatively low fixed income. It’s highly likely they will qualify again in the future. And the situation where they will literally run out is very remote. This is because of the assets thresholds. While potential Age Pension recipients still have fairly significant savings, they can still qualify for a modest Age Pension. The amount of pension they receive will slowly increase if and when their savings decrease, (because they are assessed on lower assets). Many retirees worry that one day they will have no savings and then lurch onto a full Age Pension on which they will live a much reduced lifestyle. As our Retirement Forecaster shows, this doesn’t happen. Initially, if you are keeping a close eye on when you can apply, you may receive a very low pension and still be largely self-funded. But over time the balance between these two forms of income streams shifts. It’s helpful to enter different scenarios into the Retirement Forecaster so you can judge your own spending patterns and change your retirement income strategies to be more in control of how quickly your savings reduce.

My money, my gift, so what’s to declare?

We’ve dealt with the somewhat complex rules of Centrelink and gifting quite a lot. And still the questions keep coming. It seems that there is a major trap for those who might currently be self-funded, who believe (rightly) that it’s their money and their business if they give it away to friends or relatives. But this can all come unstuck if, like 80% of 80-year-olds, they end up on an Age Pension and Centrelink looks at gifts in the previous years and decides these are deemed assets. How does this work? When is a gift not a gift? And what does this mean for your pension entitlements?

Here’s a tale of two retirees, both single homeowners. Let’s call them Liz and Jane. They both gave funds to family, but with very different outcomes.

Although Liz, at 67,  was under the income threshold and close to the asset threshold, she was still not eligible for an Age Pension. But after paying for her daughter’s wedding, she found herself below the single homeowners asset threshold of $609,250 and successfully applied for a modest, but handy, part Age Pension plus, of course, the automatic bestowal of a Pension Concession Card (PCC).

Inspired by her friend’s entitlements success story, Jane decided to do something similar. She understood that the limit for gifting was $30,000 over a five year period, so gave $25,000 to her son to help with his house renovations. Although, at face value, this is similar to what Liz did, it is not the same. Liz paid an invoice directed to her for a service she received, so this was not a gift. Jane could be seen as  trying to ‘fast-track’ her entitlements. She understood one half of the rule – but the other half of the same rule is a gifting restriction of $10,000 per annum. From her gift, $10,000 has reduced her assets, the remaining $15,000 is currently in her assets valuation and deemed by Centrelink to still earn income.

This example is brief, so if you would like to learn more of the detail on gifting and loans and timelines there are more detailed case studies here.

Check Your Entitlements

 

This article is provided by Retirement Essentials Representative Number: 001260855.  We are an authorised representative of SuperEd Pty Ltd ABN 88 118 480 907 AFSL #468859.  This information is not intended as financial product advice, legal advice or taxation advice. It does not take into account your personal situation, goals or needs and you should assess your own financial situation, consider if the information is suitable for you and ensure you read the relevant Product Disclosure Statement (PDS) if you choose to make any changes to your financial situation. It is always advisable to consult a financial adviser before making financial decisions.