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Michael Pope Blog post by Michael Pope

The Impact of the Federal Budget on your retirement

In recent articles in this series, we have discussed the state of incomes of older Australians compared to other developed nations, and concluded that we fare very poorly in such a comparison. In this article, we take a look at the proposals contained in the May 2014 Federal Budget and how they may impact on the wealth and lifestyle of older Australians. From the point of view of retirement incomes, the proposal that has attracted the most attention is the increase of the Age Pension qualifying age progressively from age 67 until it reaches age 70[1]. This measure will affect anyone born after 30 June 1958. ( Those born between 1 July 1952 and 30 June 1958 have already had their Age Pension qualifying age increased from its previous level of 65. ) Clearly this measure will reduce the number of Australians who are eligible to receive the Age Pension, which will reduce the incomes of many Australians in the 65 to 70 age group into the future compared to what they would have expected to receive under current eligibility rules. Other measures proposed in the Budget are also expected to reduce the amount of Age Pension that people can expect to receive.

One such proposal is a three year pause in the Indexation of thresholds for the Age Pension assets test and income test from 1 July 2017. Currently, the upper threshold for the income and assets tests are indexed three times a year, and the lower threshold indexed once a year. Freezing these thresholds means that over time a number of people may lose some Age Pension entitlements, and some may be denied access to the Age Pension altogether.

Another proposal which may impact on Age Pension entitlements is the reduction of deeming thresholds for the Age Pension income test from September 2017. This measure means that a higher rate will be used to determine the income deemed to have been earned on your financial assets, making it harder to pass the income test and potentially reducing your entitlement to the Age Pension.
Although I couldn’t find a specific reference, don’t be surprised if the current threshold levels are also frozen for three years ( until they are reduced in 2017 ) rather than being indexed annually as has been the case until now, further impacting people’s Age Pension.

A third proposal is to change the rate at which the Age Pension increases over time. Currently, the rate of Age Pension is adjusted twice a year, in March and September, in line with the highest of three different benchmarks, one of which is the Consumer Price Index (inflation). From September 2017, it is planned that the Age Pension would be indexed in line with just one measure – the Consumer Price Index. This is expected to reduce the rate at which the rate of Age Pension increases into the future. Although not a part of the most recent Budget, another measure which will impact on the wealth and lifestyle of older Australians is the deeming of Account Based pensions ( an Income Stream paid from a Superannuation fund ), currently planned to commence from 1st January 2015. This measure is expected to reduce the rate of Age Pension payment for many people who either commence an Account Based pension or start to receive the Age Pension after 1 January 2015. While on the subject of Superannuation, it is important to distinguish the age at which people may qualify for an Age Pension from the age at which people can access their Superannuation, known as the ‘Preservation Age’.

Currently, the Preservation Age is set at 60 for those born after 30th June 1964. The proposed change in Age Pension qualifying age has no impact on a person’s Superannuation Preservation Age, and the Budget contains no proposals to change this important threshold. However, when questioned recently[2], the Federal Treasurer Joe Hockey confirmed that changes to the age at which people can access Superannuation are “… on my mind”. Although the age at which we can access Superannuation is not yet proposed to change, there are other proposals in the Budget to modify the current Superannuation system. Perhaps the biggest impact to people’s future wealth is the revision of the timetable for proposed increases to the Superannuation Guarantee contribution rate. The proposal contained in the Budget would see the rate increase to 9.5 per cent from 1 July 2014 and remain at that level for four years, effectively pausing the previous timetable by three years, and seeing the increase to the upper level of 12 per cent rate delayed until 1 July 2022 from the currently planned date of 1 July 2019. In one piece of good news, late last year the government announced that the proposed tax on superannuation pension earnings above $100,000 a year announced by the previous government will not proceed.

 

So what does this all mean?

A number of previous articles in this series have highlighted the fact that, as Australians, we should not expect that the Government will provide us with sufficient income in Retirement to enjoy the standard of living we aspire to. This should come as no surprise, as the Age Pension was only ever intended as a safety net for those who were unable to provide for themselves, and was only ever intended to provide the most basic standard of living. The proposed changes announced in the Federal Budget reinforce the message that the Age Pension in Australia is only for those who have no other option. Of greater concern is the reduction in Superannuation Guarantee contributions, given that Superannuation is the Government’s preferred approach for people to provide for their own retirement. Coupled with other proposed changes to Superannuation announced in this budget and foreshadowed in the media, there is a clear message that Governments are willing to continue to change the rules around Superannuation on an ongoing basis.

The inescapable conclusion is that people who want a superior standard of living throughout their lives are going to need to take action for themselves to build a wealth base large enough to provide the level of passive income required to pay for their desired lifestyle in Retirement, and not just rely on compulsory Superannuation or the Age Pension to do the job for them. At Empower Wealth, our goal is to help Australians achieve their desired standard of living later in life by creating a superior financial outcome, and we have developed a suite of proprietary financial modelling tools to help people understand their current and potential future financial position, together with money management strategies to give people more control of their cashflows, get their money working harder for them and ultimately, get a better financial outcome in life. If you would be interested in seeing how these tools and strategies could be applied to your own personal financial situation, please come and see us for a free one hour consultation.

 

[1] Budget Overview : “Our welfare system must be sustainable” URL : http://www.budget.gov.au/2014-15/content/overview/html/overview_09.htm Accessed 6th June 2014

[2] Q&A : “Tough questions for Joe Hockey” URL : http://www.abc.net.au/tv/qanda/txt/s3989246.htm Accessed 6th June 2014

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