WHEN you leave work for the last time it’s important to have confidence you have set up your finances so you have enough money to cover your basic expenses, as well as a little left over for extras, says Philip Hall, financial planner at MyState Wealth Management.
There are many options available to help retirees and pre-retirees achieve this. But it’s important to understand how the superannuation and pension system works and how it affects you, so that you have the most comfortable retirement possible.
Upcoming changes to the way the aged pension works could affect how much money you have in retirement. It’s important to understand how these changes work, and the options available to you to make the most of your retirement nest egg.
First, let’s take a look at the upcoming changes and how they might affect you. From 1 January 2017 there will be an increase in Centrelink’s asset test threshold for people receiving the pension and an increase in the taper rate for amounts above the threshold. The higher assets test thresholds will generally mean:
- Age pension recipients with an asset value ‘around’ the thresholds are likely to see an increase in their age pension entitlement.
- Age pension recipients with assets above the threshold are likely to see a reduction in their age pension – in some cases to zero – as a result of the increased taper rate.
For some pension recipients with higher assessable assets this will mean they will receive a lower income after the changes come into force. In some cases, people with large asset values will no longer receive a pension.
Here is what’s changing. Your pension will reduce, or be extinguished entirely, if you are a single homeowner with $250,000 or more in assets or if you are a single non-homeowner with $450,000 or more in assets. If you are a couple and you own your own home the assets test threshold is $375,000. If you are a couple without your own home with assets valued at more than $575,000 your pension is likely to be affected.
If you are concerned about how your pension will change after 1 January next year now’s the time to talk to a financial adviser to find out what your options are to ensure you have as much money available as possible in retirement.
One option is to invest in annuities. An annuity is a financial product in which retirees can invest that pays a regular income over time.
Investing in an annuity is one way to replace the income you receive from the aged pension, if the amount you will receive from Centrelink will reduce from next year.
With annuities, you can choose the timeframe of the products – 10 or 20 years, for example. Or you can choose a product that will pay you income for the rest of your life.
There is also a range of payment options available to investors. For instance, you can choose to receive income from your annuity on a monthly, quarterly, six-monthly or annual basis, depending on how you wish to structure your finances and your retirement income needs.
Some annuities also offer an indexation option to help counter the effect of inflation. These products deliver a gradually higher income over time, so that the money you have to spend doesn’t reduce as inflation increases.
The way that annuities work, when you invest in this product, your money is pooled in a statutory fund with other investors. Generally, the fund will invest in fixed income assets such as cash and property, as well as other assets such as infrastructure and some shares. Professional asset managers are responsible for deciding how the money is invested.
In the past, investors were cautious about annuities because there was a risk that you might invest a substantial amount in the product and then die before the end of its term, reducing the value of your estate.
But these products have evolved over time. Now, if you invest in an annuity and die the day after taking it out, your estate will receive a known amount back (that you specify when taking out an annuity).
There is a range of annuities in the market, all with different terms and rates of return.
If you’re interested in exploring how annuities can help support your income in retirement, why not talk to your adviser today to see if these products are right for you?
If you’d like to find out more, call Philip Hall at MyState Wealth Management on 1300 651 600 or visit mystate.com.au/wealth.
Information is current as at 15 March 2016. This is general advice only, before making any decisions please speak with a MyState Wealth Management Financial Planner.