Pension only part of the puzzle

Government proposals to lift the pension eligibility age to 70 should serve as a wake-up call to retirees that pensions are only one part of a three pillar retirement income system, Mark Teale writes. 

For age pensioners now and in the future, the Budget has foreshadowed plans to increase the pension age to 70, changes to the index used to adjust the pension, the freezing of income and assets thresholds, resetting the deeming thresholds and no doubt the loss of some fringe benefits going forward. Whilst the prospect of working longer to qualify for the pension seems an easy issue to grasp, advisers need to be cognizant of the effect of the other changes which will have a greater potential impact on their clients’ lifestyles. 

The Budget has reinforced that the conceptual link between retirement and the age pension has to be broken.

The Commonwealth of Australia’s universal age pension is now over a century old. Back in 1910 the number of age pensioners totalled 65,600. One hundred years later in 2010, this number had grown to 2,225,000, with 80 per cent of the population over the age of 65 accessing the age pension.  Spurred on by our ageing population, the number of age pensioners is set to continue with trends indicating that by 2020 this figure will be in excess of three million. 

Over the last century, changes to the means testing of the age pension have been numerous. However despite the life expectancy increasing from 55 to in 1909 to over 80 in 2014, this Budget has been the first we have seen the qualifying age increase from 65.

Is it reasonable for the government to foreshadow an increase in the qualification age to 70 from in effect 67? The short answer I believe is yes.

Is it reasonable that the government is planning to introduce the other measures? I suspect opinion will be much divided on this based on their own circumstances and their plans and requirements in retirement.

If a person’s plans include the ability to receive a part pension I would say that the measures are not welcome.  However the proposals should serve as a wakeup call to all that the age pension is only one part of the “three pillar” retirement income system, and was viewed originally only as a safety net for those unable to fully support themselves in retirement.

Whilst a large section of the media and the public will raise concerns over the lifting of the age pension age to 70, and a number of other budget proposals, it should not be forgotten that not all the recommendations from the National Commission of Audit (NCOA) have been acted on either in full or part.

Remember pensions are assessed under both an Income and Assets test. The NCOA had recommended a number of sweeping changes to this test including the increase in the withdrawal rate of pension entitlement under the income test from .50 cents in the dollar to .75 cents in the dollar.  This would see the upper threshold for any pension entitlement reducing from (for a single person) $47,881.60 per annum to $33,245.

Whilst the government has assured the public it will not make any large wholesale effects to the age pension or the means test without going to the polls, in fact most of the proposals do not come into force until 2017 after the next election, when you consider that the age pension is the largest Commonwealth spending program at currently $39.5 billion it is very difficult to think that we will not see further adjustments over the coming years as our population ages.

Without even considering the other possible recommendation of including a person’s residential property with a value above a certain level, it is hard to imagine that qualifying for an even smaller part age pension in the future will add much to a person’s wish for a comfortable level of income in retirement.  

At present as in industry I believe we have an obligation to those people who are currently retiring to investigate their age pension entitlement and to structure their affairs to ensure that they receive their maximum age pension entitlement based on their circumstances.

But I also believe we have an obligation with our younger clients to educate them to understand that retirement does not have to be linked to their qualification for an age pension.    

Retirement should be a choice that they make when they are ready physically, mentally and financially. It should not be viewed as a mythical age some time in the future linked to a government payment. Younger people need to be educated on the importance of the other two pillars of savings for your own retirement - personal savings and superannuation. 

Their acceptance of the responsibilities of providing for their own retirement is paramount and as an industry we need to be at the forefront of this new wave of thinking, breaking that conceptual link between retirement and the age pension.  

Mark Teale is the technical manager at Centrepoint Alliance.

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