A Plan to Simplify and Streamline Superannuation
6.1.1 Current arrangements
The design of the income and assets tests which apply to eligibility for the age pension, including the pension withdrawal rates, has important implications for incentives to work and save for retirement.
The income test is relatively generous. A single person can earn up to $36,000 per annum and still be eligible for a part-rate pension. Under the current assets test, a person loses $3 per fortnight for every $1,000 of assets above the relevant threshold, starting at $157,000. A single homeowner loses all pension entitlements once their assets exceed $325,500. Assets include most superannuation assets.
The assets test is very punitive as retirees must achieve a return of at least 7.8 per cent on their additional savings to overcome the effect of a reduction in their pension amount. This high withdrawal rate creates a disincentive to save or build retirement savings.
6.1.2 Proposed new arrangements
It is proposed that the pension assets test taper rate be halved from 20 September 2007 so that recipients only lose $1.50 per fortnight (rather than $3) for every $1,000 of assets above the relevant threshold. This would mean that retirees would need to achieve a return of 3.9 per cent on their additional assets before they are better off in net income terms — that is, after taking account of the withdrawal of the age pension. Under the proposal, a single homeowner would not lose entitlement to the pension until their assets reached approximately $494,000 (based on current pension rates and thresholds). The corresponding figure for a homeowner couple would be approximately $783,500.
The reduction in the assets test taper rate would increase incentives for workforce participation and saving especially for those people nearing retirement who will still depend on the age pension to fund part of their retirement.
Chart 6.1: Pension withdrawal rates (for a single person)
6.2.1 Current arrangements
‘Complying’ income streams which were purchased before 20 September 2004 are eligible for a full assets test exemption. ‘Complying’ income streams purchased on or after this date are eligible for a 50 per cent exemption. The reduction in the assets test exemption in September 2004 was designed to limit the scope for wealthier individuals to utilise the concession as a way of accessing the age pension and the associated concessions.
6.2.2 Proposed arrangements
The current 50 per cent assets test exemption for ‘complying’ income streams would be removed from 20 September 2007. Retaining the assets test exemption alongside the reduced assets test withdrawal rate would create scope for wealthier individuals to access the age pension.
This change would only apply to income stream products purchased on or after 20 September 2007 and would not affect the assets test treatment of income streams purchased before this date.