Changes to the Age Pension Asset Test – January 2017

The Australian Government Legislation changes to the Age Pension announced in the 2015/16 Federal Budget will take effect from 1 January 2017.

These changes will see the thresholds applied to the Age Pension asset test increase at the lower end and reduce at the upper end.  Recent reports suggest that more than 300,000 Age Pensioners will have at least part of their pension cut, with just under 100,000 of these people losing all Age Pension entitlements, taking effect from January 2017.

Many Australian age pensioners are concerned about the impact this will have on their pension payments, and are looking for ways in which their assessable assets can be reduced. This has led to an increase in people seeking independent financial advice before they making any decisions on changes on their finances. This should take into consideration your personal circumstances and financial goals.

How you can prepare for the changes?

Depending on how these changes will impact you, there could be a number of things for you to consider, including:

  • If your entitlements are reduced, how will you replace lost income?
  • Do your assets need trimming down? A financial adviser can help you with asset reducing strategies.
  • Do you have any large planned expenses, such as a holiday or home repairs for example, that might reduce your assets before the changes come in?

One such strategy for reducing your assessable assets

You might want to consider either a prepaid funeral or a funeral bond, as an effective means to reduce your assessable assets. Here are some answers to some commonly asked questions regarding both:

Funeral Bonds  An investment in a funeral bond is exempt from the Income and Assets Test providing no more than two funeral bonds are held and together they do not exceed the maximum eligible investment threshold (currently $12,500).

Therefore, for those affected, an investment in a funeral bond for the maximum allowable amount of $12,500 may increase a pension entitlement by $975 per year. For a couple, each partner can invest $12,500 which may result in in a combined increase in pension of $1,950 per annum or $75 per fortnight.

With a funeral bond, you have the choice of nominating a family member/friend or funeral director to be paid the funeral benefit at the time of your death. You are free to change the nominee at any time and consequently are not locked in to using a particular funeral director.

At the time of your death the nominee is paid the total funeral benefit and must pass on any residual amount to your estate after paying for the funeral expenses.

Pre-paid Funerals  Purchasing a pre-paid funeral does not impact on a pension entitlement, as it is not subject to an Income and Assets Test.

Your preferences for the type and style of funeral you want (see our Pre-Arranged Funeral section) are documented in a written contract and paid for at current prices. Subject to any specific terms of a pre-paid funeral contract, (eg if Government taxes are subsequently imposed or increased), your family will not have to pay any additional amount for that contracted funeral, regardless of when the funeral is required.

However most prepaid contracts do not include the cost of a burial plot, and possibly cremation fees and some other expenses (eg administration fees), which will need to be paid by the family at the time of the funeral.

Pre-paid funeral funds are invested with an independently managed funeral fund, and are only released to the funeral director once the contracted funeral service is completed, in strict accordance with the various State Acts and Regulations. In essence, such a pre-paid funeral ‘contract’ is an example of a funeral bond.

As consideration for the funeral director taking on the liability of a prepaid funeral, the funeral bond that is normally used to ‘invest’ the funds is assigned to the funeral director by the ‘investor’. This transfers the ownership of the prepaid contract (funeral bond) to the specified funeral director. The funeral director may include an extra fee to offset the risk of potentially holding a prepaid contract for a long time.

By taking out a prepaid contract the ‘investor’ loses the flexibility to change their funeral arrangements to another funeral director.

Should you move to an area where the selected funeral director is unable to provide the funeral service, you can apply to have the prepaid contract (funeral bond) transferred to another funeral director. The original funeral director may charge a fee to release the prepaid contract.

Pre-paid Burial Plot  A burial plot is either a specific place (for example, a cemetery plot, interment niche or mausoleum), or a right to be interred at a general location (for example, in any available plot in a specific cemetery).

It is almost always less expensive and less stressful to purchase cemetery plots or crypts in advance, rather than purchasing them after a death has occurred. Purchasing a pre-paid burial plot does not impact on a pension entitlement, as it is not subject to an Income and Assets Test.

If you are wishing to be buried or interred alongside family members, you may want to consider purchasing multiple plots or crypts not only to save money, but also to ensure that the cemetery will be able to meet your needs when the time comes.

Cemeteries often give discounts for multiple plots purchased together. Most cemeteries have the option of either single, double or triple depth plots, whereby more than one deceased can be buried.

Before making any purchases, it may be wise to discuss your plans with your family members and to make sure that the arrangements you’re making meet everyone’s needs. It may also be a good idea to consider what will happen to the plots or crypts you’re purchasing if family relationships should change (marriages, divorces, re-marriages, etc.).

It is important that your family or friends are advised that arrangements for your funeral have been made in advance. Copies of the funeral bond or pre-paid funeral contract should be provided to your family or friends, or filed with your Will and other important documents.

Please use our Business Directory Search facility to find ‘Funeral Bonds‘, ‘Funeral Insurance‘, ‘Funeral Directors (Pre-paid Funerals)‘, and ‘Cemeteries and Crematoriums’ that service your local area.

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