End of financial year and the age pension
The end of financial year is not only a good time to review your clients’ tax position, but is also an opportunity to help them make the most of their age pension entitlements.
It is the end of May and the end of the financial year is fast approaching. Now is a good time to review your client’s financial position, and no, I am not talking about the usual subject which comes to mind at this time of year: taxation.
I am talking about those clients in receipt of an age pension; clients whose assets may just preclude them from getting an age pension and your clients who are residents of aged care homes.
Why is now a good time?
On 1 July each year, the assets and income test thresholds for the age pension are increased to account for an increase in the consumer price index (CPI). This increase results in a corresponding increase in the upper threshold limits at which a person is precluded from receiving an age pension.
Threshold amounts have not been released, however, for those people of age-pension age who may not have qualified in the past because of their assets. Now could be the time to review their situation.
As an example, a couple who own their own home and have assets other than their principal place of residence of $900,000 could, with some careful planning, be eligible for the age pension post-1 July 2020.
The current upper asset dollar threshold at which a person is not entitled to any age pension for a couple who own their home is $869,500. If the threshold is adjusted by 2 per cent, this will increase to $886,890.
While this still puts them over the threshold, they could gift $10,000 before 30 June and then gift a further $10,000 after the 1 July to bring their total assets to $880,000. The result would be that they may be entitled to an age pension at the minimum rate of $56.40 per fortnight combined or on an annual basis $1,466.40 combined.
I think you would agree, this is not a bad return for gifting $20,000.
I should point out that under Social Security legislation, you can gift an amount of $10,000 each financial year, up to a maximum of $30,000 over a period of five years.
For the client who is averse to gifting away assets, they could, if they wished, take advantage of investing $13,250 into a funeral bond. As the funeral bond is an exempt asset, a couple could invest into two bonds (one in each name) and reduce their assets immediately by $26,500 and achieve a similar result.
It is important to note that on 1 July, the amount a person can invest into a funeral bond will also increase.
For your clients who are in receipt of a part age pension because of either their assets or income, the changes to the threshold levels on 1 July will also mean an increase in their age pension.
For these pensioners, now is also a good time to review the assets and income that are being assessed by Centrelink or Veterans Affairs, to ensure that the amounts being assessed are correct.
Small adjustments can make a substantial difference. Motor vehicles are a good example. If Centrelink is assessing the value of a person’s vehicle at $20,000 and the true current value is $15,000, for a single person whose age pension entitlement is assessed under the assets test, this correction in value can mean an extra $15 per fortnight or $390 per annum. Certainly, enough to fill the car with fuel several times.
Advisers should also review the entitlements of clients who are residents of aged care homes to ensure the information held by Centrelink and Veterans Affairs is correct. This information is the basis for calculating a person’s daily means-tested care fee. These fees are adjusted on a quarterly basis, with the next adjustment and review of a person’s fees to be made on 1 July.
If the information held by Centrelink or Veterans Affairs is not correct, then not only could the client’s pension be incorrect, the means-tested care fee they are paying could also be incorrect.
The other good news for age and service pensioners assessed under the income test is that on 1 July, the deeming thresholds at which the value of their financial assets are assessed at either the lower or higher interest rate will also increase, resulting in a further increase in their pension.
Unfortunately, the Social Security legislation as we know is complicated and can cause your clients to scratch their heads trying to understand if the pension they are receiving is correct.
As advisers, it is our role to understand the legislation and how it relates to our clients’ circumstances to ensure they are receiving their correct entitlement. You, their adviser, are the person they need to turn to when they are confused, wondering if the letter they have received from either Centrelink or Veterans Affairs is correct.
In closing, let me emphasise the message: now is the time to spend time with your clients to review their pension entitlements. This should happen whether they are in receipt of a part age or service pension, a resident in an aged care home, or someone you believe may be entitled to an age pension post-1 July as a result of the increase in the threshold.
Do not wait until after 1 July 2020 — it could be too late.
Mark Teale, Retirement Strategies and Solutions and Technical Support, Centrepoint Alliance