RETIREES worried about tougher new age pension rules are trying to lower their Centrelink-assessable assets through buying funeral bonds and other strategies.
In a recent article published in news.com.au by Anthony Keane, several Financial experts including David Koch and Planning for Prosperity’s own Bob Budreika were interviewed on the impact of the impending Centre-link entitlements and in particular how these changes will impact pensioners
Jan 1 pension entitlement changes
In summary, from January an estimated 300,000 people will lose part or all of their age pension, while about 170,000 low-asset pensioners will receive a boost, as the government lowers the level of assets you can hold before pensions reduce.
Kochie’s video here provides a quick summary of the impact to pensioners, while the detailed article by Trish Power on SuperGuide provides more detail.
Planning for Prosperity senior financial adviser Bob Budreika believes many retirees are in for a nasty surprise in January when the pension changes hit.
“I think a big part of the population isn’t really aware,” he says. “Retirees who don’t have a financial planner don’t realise what they need to do.”
Don’t blindly reduce assets
However, Bob cautions people from blindly trying to lower their assets for the sake of preventing pension cuts, because the longer term cost of losing the assets may be greater.
“There’s an attitude with some people to do whatever they can to make sure they maximise Centrelink. Some of the decisions they make can be pretty silly,” he says.
“Look at two sides of the equation. Ask yourself “if I do tie up assets in a home renovation, funeral bond or gifting, what is it going to mean for my long-term financial security because that money is effectively gone.”
Bob Budreika is quoted in this new.com.au article on the worsening financial outlook for aging Australian baby boomers
Age Pension changes may reduce retirees incomes
Added pressure is coming from age pension changes that will knock thousands of dollars off the incomes of many retirees in 10 months’ time, while some popular shares owned by mum and dad investors have slashed the size of their dividend payouts.
Average term deposit interest rates have dropped by more than two-thirds per cent since 2008, from 7.6 per cent to 2.4 per cent, denting the incomes of the 3.6 million Australians aged over 65 and millions more Baby Boomers aged in their 50s.
Pension asset tests
Tougher rules for the age pension asset test from January next year will mean 300,000 retirees are set to lose part or all of their pension.
“When you do the numbers, some couples getting a full pension now are going to lose $11,000 a year combined, and if they become single because one dies, they get zero,” Mr Budreika said.
He said the income crunch would force many older Australians to consider unconventional measures such as working longer, selling their homes or taking out reverse mortgages.
On our recent visit to the Eyre Peninsula, we heard a recurring theme: “We’re looking a buying a property in Adelaide”. This is no surprise, as the banks are more deeply leveraged into residential lending than ever before. We have seen the slice of bank residential lending swing from roughly 30% of all loans in the early 1990s to nearly two thirds currently. Around 33% of all monthly loans written are now for investment properties.
Our response to everyone was the same. Forget about whether you think property will be a good investment for the moment. In fact, it doesn’t matter what investment you are thinking about. The question you need to ask yourself is “what am I trying to achieve?”
Talking about a property in Adelaide – is it for the kids to live in while they study? Is it for you to stay in when you travel? Would you eventually look to live there in retirement? The answers to these questions are much more important than what suburb you think would be nice. If lifestyle is more important, then this should be more of a focus than investment returns. Of course, the other alternative is to rent.
I scrunch my face into a ball when I hear the term “rent money is dead money” – not because I am pro-renting or anti-buying but because this statement is inherently flawed. Why? It makes the assumption that the cost of renting and repaying a mortgage are equal, meaning you may as well spend this money to pay off your own house. This would be great if it were true but we all know this is hardly ever the case, especially when you add in the other associated costs of home ownership. Another forgotten factor is that some people choose to rent because it suits their ever-changing lifestyle. This is akin to taking a taxi for a short journey because it is more convenient than buying the vehicle.
Renting and buying both have vastly different costs and lifestyle implications that will be judged differently depending on an individual’s situation at any given time. A blanket statement such as “Rent money is dead money” does not factor in the opportunity and flexibility that renting provides over ownership, nor does it take into account the surplus money that can be saved, invested or blown elsewhere that would have otherwise been spent on mortgage repayments and other costs. Using the same logic, one could easily make the same ridiculous statement about paying interest to a bank. Is that not dead money too? Maybe, maybe not. It all depends on your situation and what you are trying to achieve.
In the end you need to ask yourself what is most important and be willing to accept that there are good and bad financial and lifestyle implications associated with both options.
I recently finished reading a great book titled ‘Dog Days’ by Ross Garnaut. While it might have a fiction sounding title, it’s a non-fiction economic book. Ross Garnaut is very well known as a Professor, Government adviser and Board member of several well known Australian companies.
For some time I’ve held the same view as Mr Garnaut that Australia is now living a dream and we’ve become incredibly complacent especially since steering through the GFC almost unscathed. It seems that our nation has a feeling of invincibility and things are ‘different this time.’
Ross Garnaut’s analysis shows that we are at a tipping point where we will be confronted with making difficult national decisions based on outcomes for the good of everyone and not favoured groups. We’ve all benefited from a vastly higher standard of but unfortunately, much of this success has little to do with our work ethic or how smart we are but from the fortune of having resources and commodities that other nations have needed.
The resource cycle, since 2011, is now is steady decline. We’ve become far too dependent on exports and at the same time seen almost all other domestic non resource businesses struggle due to the expensive Australian dollar and high domestic costs. The complacency has resulted in much lower productivity for over a decade. It seems that you can hide behind inefficiency while times are good but eventually it catches up.
Unless we are lead, and accept to be lead, through this era of change, we are likely to realise lower living standards going forward. You could call this; pay back. If you think this isn’t possible ask middle class Americans or Europeans how different their lives are post 2008.
This might sound rather negative but Mr Garnaut’s (and my belief) is that we can avert the decline in living standards if we accept decisions that are in the common good of everyone. This will need a major shift in our thinking and attitudes and above all, true leadership in Government, business and the community.
While Mr Garnaut presents the bigger picture, it’s quite easy to identify with the complacency all around us. If you consider your own region, most of the EP has experienced an unprecedented ‘purple patch’ of above average seasons including higher grain prices, record sheep and wool prices. It can be easy to take the ‘eye off the ball’ and become more complacent. Nobody aims to be complacent but I suppose this is human nature. This is why it’s important, not only for our nation but as individuals to be aware and be prepared for the changes that will be forced upon us. It’s quite obvious that the Commonwealth Government is enacting major legislative changes because they know we’ve been living beyond our means.
My final note: History does repeat itself but the events and circumstances make things seem different or ‘different this time.’
If there’s one simple and effective financial strategy that is sure to work it’s about creating a discipline. I’ve been in the financial planning industry for almost 26 years and what stands out more than anything is the difference in peoples’ attitudes towards investing and saving over that time.
I joined the industry at an interesting time with the demise of insurance products like Whole of Life and Endowment assurance policies (some of you may recall or even still have such policies) and the promotion of investment plans and term insurance contracts as the way to go. Many people who were given poor ‘advice’ to surrender these policies and start a new investment fund when they may have been better off retaining them.
It’s true that the old style life contracts didn’t perform all that well from an investment perspective but they were designed to primarily to be life contracts with cash surrender values. What has always amazed me is that people continue to pay the premiums year in year out, which shows their ability to save regularly.
Fast forward to the last decade or so and the attitude by many investors is quite different to days gone by. It’s rare to see someone commit to saving regularly over 10 years or longer (outside of their superannuation). There seems to be an impatience with investors today who expect great short term results. Perhaps a good illustration are share market investors. In the past it wasn’t uncommon for people to buy and hold shares for many years. Today for many, it’s the exact opposite. I put it down to the ease of online access and instant gratification – we want everything now and quickly! I might add the problem is also with our industry that offers a plethora of ‘exciting and sexy’ investment products.
It might sound like I wish things never changed and we went back to using candles. That’s not what I’m on about and the point I want to make is that some of the ways of the past are just as relevant today as they have always been. The path to creating real wealth hasn’t changed. If you weren’t born rich then the most effective way of achieving wealth is to regularly set something aside by establishing a savings discipline. Then let compounding do its magic. It might sound a little simplistic but it works.
In fact, being successful at almost anything has a lot to do with being disciplined and focused. Look around and you can see many examples of this.
The first step to creating wealth is to have clear goals and outcomes that motivate you. Quantifying your goals will help you to identify the time frame and how much money you need to make them achievable. Now you’ve got the reason to start saving regularly. That’s being disciplined.
For a fresh perspective, sign up to our newsletter
This information is of a general nature only and neither represents nor is intended to be specific advice on any particular matter. We strongly suggest that no person should act specifically on the basis of the information contained herein but should seek appropriate professional advice based upon their own personal circumstances. You should read the PDS and consider whether the product/s is right for you. Past performance is not a reliable indicator of future performance.
Strategic Advice Solutions Pty Ltd (ABN 86 619 221 662) t/as Planning for Prosperity is a Corporate Authorised Representative of Infocus Securities Australia Pty Ltd (ABN 47 097 797 049) AFSL and Australian Credit Licence No. 236523