Using an Annuity to Maximise Your Age Pension Entitlements

From 1 January 2017, government changes to the age pension are likely to reduce many age pension recipients’ entitlements. The changes will include an increase to the lower asset test thresholds, which will be beneficial for those with low asset levels, and more adversely, a decrease in the upper asset test threshold via a change to the ‘taper rate’.

It is important that you understand how the changes could affect you and what strategies could be put in place to maximise your entitlements over time.

Increase in the ‘taper rate’

The taper rate is the rate at which the age pension reduces as assets increase above the lower thresholds. From 2017 the taper rate will increase from $1.50 a fortnight to $3 a fortnight. As a result age pension recipients with higher asset levels are likely to see a reduction in their age pension – in some cases to zero. The following table demonstrates how the changes can impact a couple who are homeowners.

The effect on age pension for a couple (homeowner):

The effect on age pension for a couple (homeowner):

Assessable Assets Current Age Pension Age Pension 1 Jan 17 Changes in Age Pension
$200,000 $34,382 $34,382 $0
$300,000 $33,915 $33,915 $0
$400,000 $30,346 $32,290 $1,944
$500,000 $26,446 $24,632 -$1,814
$600,000 $22,546 $16,832 -$5,714
$700,000 $18,646 $9,032 -$9,614
$800,000 $14,746 $1,924 -$12,822
$816,000 $14,122 $0 -$14,122
$900,000 $10,846 $0 -$10,846
$1,000,000 $6,946 $0 -$6,946
$1,100,000 $3,046 $0 -$3,046
$1,200,000 $0 $0 $0

Assumes all assets are financial assets that are deemed under the income test.

Is an annuity right for you?

There are a number of strategies that can be utilised in order to reduce your level of assessable assets, and annuities are just one option. Contemporary annuities offer greater flexibility than previously and now provide choices in term, payment frequency, return of capital and inflation protection.

An important feature of some annuities is that they are able to interact efficiently with your age pension benefits. They are able to do this due to their decreasing assessable asset value over time.

Due to the treatment of certain annuities by Centrelink, each year an annuity is held, the assessable asset value will decrease by an annual deductable amount, even though you may be able to withdraw up to 100% of the original purchase cost in the future.

Case study

Case study

Bill and Jane (both 68) are a homeowner couple with assessable assets of $600,000 of which they have $300,000 each in account based pensions. Currently they receive $22,546 in age pension entitlements, which will reduce to $16,832 on 1 January 2017, a reduction of $5,714 p.a.

On the advice of their financial planner, they decide to purchase a liquid annuity of $99,000 each with a withdrawal guarantee of a minimum 75% within the first 15 years. They each receive regular payments of $4,950 p.a.

Due to the reducing assessable asset value of the annuity, their age pension entitlements may increase by $20,506 over 15 years. Likewise, as they will not be required to draw on capital to meet their income needs, their portfolio may increase by $64,743.

By using an annuity, Bill and Jane have not only been able to increase their cash flow but also increase their overall portfolio.

Speak with your adviser to see if an annuity may be suitable for you.

Shauna Broes
Associate Adviser, First Financial

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