From 1 January 2017, some retirees will see an increase in their age pension. However, many others will face a cut, or lose the pension altogether.

If you’re approaching or preparing for retirement, changes to the age pension eligibility rules could affect your plans. Let’s have a closer look at these changes.

Under the age pension asset test, the value of any property and other assets you own (excluding the family home) will affect your age pension entitlement. From 1 January 2017, the allowable level of assets will increase from $209,000 to $250,000 for single homeowners, and from $296,500 to $375,000 for couples who own their own home.

Assets test free area for full pension

Pensions start reducing when assets are more than the following amounts.

Family situation Homeowners Non-homeowners
  1 Jul 2016 1 Jan 2017 1 Jul 2016 1 Jan 2017
Single $209,000 $250,000 $360,500 $450,000
Couple combined $296,500 $375,000 $448,000 $575,000
Illness separated couple combined $296,500
$375,000 $448,000 $575,000
One partner eligible, combined assets $296,500 $375,000 $448,000 $575,000
Assets test limits for part pensions

Part pensions cancel when assets are more than the following amounts.

Family situation Homeowners Non-homeowners
  20 Sep 2016 1 Jan 2017 20 Sep 2016 1 Jan 2017
Single $793,750 $542,500 $945,250 $742,500
Couple combined $1,178,500 $816,000 $1,330,000 $1,016,000
Illness separated couple combined $1,466,000
$960,000 $1,617,500 $1,160,000
One partner eligible, combined assets $1,178,500 $816,000 $1,330,000 $1,016,000

The higher limit is good news if you have fewer assets because it means you could qualify for the full age pension or a higher part pension. On the other hand, if you have a larger pool of assets, your pension may be reduced or you may not qualify at all.

The family home exemption can be very important

When it comes to age pension entitlement, those who own their home have a distinct advantage. From 1 January 2017, the lower threshold for a couple who don’t own their home will be $575,000 compared to $375,000 for a couple who do own their home. This implies the home is worth just $200,000!

So if part of your retirement strategy is to downsize the family home, think carefully because the full value of your primary place of residence is exempt from the age pension asset test.

The taper rate is the amount of pension payment you lose for owning assets above the full age pension threshold, and it will be doubled from 1 January 2017. At the moment, $1.50 of a fortnightly pension is lost for each additional $1,000 of assets above the lower threshold. From the start of 2017, the taper rate will be doubled to $3.00.

For example, if you own $10,000 in assets above the lower threshold (as shown in the table in the previous section), your pension is currently reduced by $15 per fortnight. From 1 January 2017, this will be doubled to $30 per fortnight.

Let’s look at two examples of how the changes can affect people in different circumstances.

Positive outcomes

Mike and Hope will benefit from the changes because they own their home and have financial assets totaling $370,000. This exceeds the current threshold for a full pension by $73,500, so their pension will be reduced by $110.25 to a combined sum of $1,212.15 per fortnight. Come 1 January 2017, the threshold for the full pension will increase to $375,000. With assets below this threshold, Mike and Hope will find themselves receiving an increased pension of $1,322.40 per fortnight, including supplements.

Negative outcomes

It’s a different story for John and Ann. As homeowners with assets of $750,000, they currently share a fortnightly pension of $642.15. However, when the higher taper rate cuts in from January 2017, their pension will drop to just $197.40. That’s a reduction of $444.75 per fortnight or more than $11,500 per year.

Age pension recipients who lose their entitlements as a result of these changes will now qualify for the Commonwealth Seniors Health Card. This card provides holders access to cheaper medicine, health services and subsidised electricity bills.

The age pension is subject to both an assets test and an income test. Whichever produces the lowest pension payment is the one that applies. While this article concentrates on the asset test because of the impending changes, it’s worth remembering that the income test was changed in January 2015.

Deeming assumes that any financial investments are generating a certain amount of income, regardless of the amount of income they actually earn. The income test changes on 1 January 2015 extended the deeming rules to income streams (account-based pensions). This deemed amount is added to your total income for age pension assessment purposes.

If you make a change to your current income stream, it may trigger assessment under the new rules.

If you’re thinking about downsizing the family home, you might want to consider alternatives because your primary place of residence is exempt from the age pension asset test. Alternatives to downsizing could be to renovate your existing home, or even upgrade to a higher-value home. Assets can also be reduced by gifting (but don’t forget the gifting rules) or spending on travel and lifestyle.

It’s important to consider your overall situation because maximising age pension payments by reducing assets may not be the best way to achieve long-term financial security.

The examples used are illustrative only based on the figures used and the current rules and proposed changes as at 1 January 2017. This does not constitute a recommendation, nor does it guarantee an outcome. You should seek advice based on your personal objectives and circumstances.

Financial planning advice is provided by First State Super Financial Services Pty Ltd ABN 37 096 452 318, AFSL 240019.