Maximise your retirement income - understanding the coming changes to annuities

How annuities will change

Right now when you invest in a 50 percent asset test exempt annuity (also known as a 'complying annuity'), half of the amount you invest is exempt from the Assets Test, which is used to calculate your Age Pension entitlement. However, annuities purchased after 20 September this year will have no exemption from the Assets Test. This means that Centrelink or the Department of Veterans' Affairs (DVA) will include the entire amount of your investment as an asset when calculating any Age Pension entitlements.

The good news is that if you take up one of these complying income streams before 20 September 2007 it will retain its 50 percent asset test exemption in the future. So if you are considering investing in one of these types of investments, now is the time to speak to Kensington Partners to find out if you can maximise your retirement income by investing before 20 September.

Another change to be introduced on 20 September means many retirees will receive an increased Age Pension and some non-pensioners will become eligible for the Age Pension. The cut-off rate for the level of assets a person or couple can have to be eligible for a pension will increase.

Anyone who is currently eligible for a part Age Pension, is assessed under the Assets Test, and invests in a complying annuity before 20 September 2007, will receive an increased Age Pension compared to the same situation if they start their annuity after 20 September.

Some non-pensioners will become eligible for the Age Pension as a result of the increased thresholds.

Some non-pensioners will become eligible for the Age Pension by taking up a complying annuity prior to 20 September, 2007.

It is an income stream - often an annuity - that meets certain requirements set by the Government. Funds are invested in exchange for a pre-determined, guaranteed income stream in retirement. If it satisfies certain criteria, the annuity will be a 50 percent asset test exempt income stream in relation to the Assets Test for Centrelink or DVA assessment. It also receives a generous Income Test treatment.

The income must be paid for a minimum period of your expected term of life. The income may be fixed or indexed each year either by a fixed amount (for example 3 percent), or by inflation. Once purchased, you generally cannot withdraw lump sums from the capital you used to purchase the income stream. So asset test exempt income streams provide you with a guaranteed income whilst maximising your Age Pension benefits.

A home-owning couple with $500,000 in assessable assets is currently eligible to receive an Age Pension of $1,815 per year, or $69.80 per fortnight. If they put 30 percent of their assets (i.e. $150,000) into a complying annuity on 1 June 2007, their Age Pension would increase to $7,664.80 per year, or $294.80 per fortnight.

Come 20 September, their pension would rise to over $15,300 ($588.46 per fortnight). That's 24 percent more than they would receive had they not gone into the complying annuity. With the improved Assets Test and the complying annuity investment, this couple's disposable income would increase by over $519 a fortnight, and that's not including the income the annuity is paying them!

A home-owning couple who has $700,000 in assessable assets is currently not eligible for any Age Pension or the Pensioner Concession Card. On 20 September, this will change and the couple can claim an Age Pension of $4,584 per year.

If this couple put $207,000 into a complying annuity strategy before 20 September, their pension qualification would almost double to $8,620 per year. Therefore it's not just existing pensions that can benefit from this strategy. Those with assets above the Assets Test cut-off thresholds stand to gain as well. But this opportunity closes on 19 September this year, so now is the time to speak with the knowledgeable team at Kensington Partners.