Social security changes create new opportunities for families

If you expect to receive an Age Pension increase in September, or to become eligible to receive an Age Pension for the first time, consider strategies that could benefit your children or wider family.

Under the Government's Better Super rules, people of Age Pension or Service Pension Age may benefit from a change in the Social Security Assets Test, effective 20 September 2007.

You may be eligible to receive the Age Pension for the first time ever (or a greater amount thereof) because the assets test taper rate, used to determine your entitlement to an Age Pension, is changing.

It means you can have a greater value of assets and still receive some Age Pension.  If you were previously ineligible for an Age Pension payment because of the value of your assets, you may become eligible from 20 September 2007.  If you're currently on a part Age Pension, you may get an automatic increase from 20 September 2007.

In other words, the changes to the Social Security Assets Test could result in more cash in hand each fortnight.  When combined with Better Super (no tax on your super payout if you're in a taxed super fund and 60 or older), it may provide a further boost to your income.

A Case study

Currently a homeowner couple with $500,000 of assessable assets, would receive only $2,400 of Age Pension per year between them, based on the current Social Security Assets Test.  From 20 September 2007 this would increase to approximately $12,600 per year between them - an increase of just over $10,000.  (Consult a financial adviser to calculate a figure for your situation.)

How to spend an increase in the Age Pension

Many will use it to pay down debt or improve their retirement lifestyle.  However, some may see it as an opportunity to help (younger) family members.

There has been plenty of commentary about the ageing Baby Boomer population and the 'Spend the Kids Inheritance' (SKI) phenomenon.  From our experience, much of the SKI 'trend' is myth.  Many retirees manage their finances according to a sound investment strategy that takes into consideration the intergenerational exchange of wealth.

For instance, numerous retirees request a financial plan that involves bequeathing assets to their children.  This usually includes the family home but frequently it includes investments (such as shares, managed funds, investment properties and the remaining balance of their superannuation or pension fund).  Many also express concern about the financial pressure their children are under right now; such as mortgage stress, buying a home and contributing enough to super.

If your income increases from 20 September 2007 you have the option of using any surplus cash flow to help your children "sooner rather than later".  Of course you need to ensure you can afford it and that it is consistent with your financial objectives.

Possible strategies that may be of interest:

• Help children pay off their mortgage - You may consider using any surplus cash flow toward mortgage repayments to help children or grandchildren (especially if the children are maintaining their repayments).  The interest saved could be substantial, and the loan time could be cut substantially, allowing your children or grandchildren to begin their own retirement savings strategies sooner.
• Help children with a deposit for property - An alternative strategy involves gifting a lump sum amount to children for a property deposit as the capital you need to meet your future income needs may be reduced.  This needs to be planned carefully as it is impacted by the social security "deprivation provisions".
• Help children build super - If you provide your children with additional income they may then divert some of their salary into super - that is, they could enter into a salary sacrifice arrangement which allows them to save for their own retirement.  This allows the children to maintain the same level of income while enjoying the concessional tax treatment on the salary sacrificed amount.
  

Protect your family against the unexpected

Should your children suffer an injury or illness, it may prevent them from earning an income and repaying their mortgage (or other debts).  Consider using some of your surplus income to fund insurance premiums - particularly income protection, but maybe also Trauma insurance.

Intergenerational wealth planning can be complex.  There will be multiple tax, legal and estate issues to consider - not just financial.  An appropriately qualified and licensed financial adviser will be able to help you identify opportunities.  Financial advisers can work with your accountant, tax agent and solicitor for a co-ordinated approach.

You could even consider visiting a financial adviser with your children to get a better idea of how your respective financial situations can be better integrated.

Seek advice

Speak with an appropriately licensed financial adviser about your options.

Disclaimer

This information has been prepared by Mercer Human Resource Consulting Pty Ltd ABN 32 005 315 917 as a corporate authorised representative #260851 (refer to our Financial Services Guide) of Mercer Investment nominees Limited ABN 79 004 717 533 AFS Licence #235906. This material includes general advice. The general advice had been prepared without taking into account your personal objectives, financial situation or needs. Therefore, before acting on this advice you should consider the appropriateness of the advice having regard to your personal objectives, financial situation and needs. You should also consult a licensed or appropriately authorised financial adviser before making any investment decision. The views expressed in this articles are the author's views and not necessarily those of GESB.