Changes to the age pension assets test that took effect from January 1 have seen about 200,000 better-off retirees receiving smaller pension payments.
A further 100,000 have lost their pension altogether.
![It's not too late for many retirees to get back some of the age pension.](/web/20170120192737im_/http://www.theage.com.au/content/dam/images/g/s/k/h/g/x/image.related.articleLeadwide.620x349.gtpyhd.png/1484695891066.jpg)
Those facing changes to their pension received confirmation letters from Centrelink during December, but there are still things that many retirees can do to claw back some of the pension.
"Some of my clients have been shocked by the size of the pension cuts, from receiving over $10,000 a year to being left with only a few thousand dollars has really hit them hard," says Jonathan Philpot, a partner at HLB Mann Judd Wealth Management NSW.
"Most of my clients will now need to increase their withdrawals from their pension accounts in order to meet their living costs," he says.
While it's unlikely anyone affected by a reduction or loss of age pension will end up in financial hardship, there's no doubt that people losing $8000 or $10,000 a year in pension will have to make changes to their lifestyle, Philpot says.
Retirees have also endured lower returns in recent years from low-risk investments, such as term deposits, as interest rates have fallen to historic lows.
The changes
The pension changes allow more people with modest savings to receive the full age pension, but the "taper rate", the rate at which the pension reduces with each dollar of assets above the threshold, has doubled.
The new pension cut-out threshold for a home-owning couple is $816,000, down from $1,178,500.
Under the worst-case scenario, a home-owning couple with $816,000 in assets who were receiving annual pension payments of $14,122 would lose the pension altogether.
A single home-owner's pension now cuts out at $542,500.
Assets counted under the test, "counted" assets, include just about everything: super, investments, savings, household goods, cars, boats and caravans.
An exception is the family home, which is not counted in the assets test. There is also an income test for the age pension, but most people are caught by the assets test.
Losing the pension also means losing the pensioner discounts, such as those on property and water rates and car registration.
However, to soften the blow, those retirees who lose the pension have received, or should soon receive, the Commonwealth Seniors Health Card, which provides them with discounts on prescription medicines and bulk-billed doctors' appointments.
They also receive the Low Income Health Care Card which, depending the state or territory, could provide concessions on water rates and energy bills, among other discounts.
Rewarded for spending
One of the effects of the sharper taper rate is that retirees above the new assets thresholds for the full pension but below the level at which the pension cuts out altogether have greater incentive to deplete their retirement savings more quickly.
That's because for each $1000 dollars of assets they spend, they receive 7.8 per cent or $78 a year in higher pension payments. Before the changes it was half of that – 3.9 per cent or $39.
And, with interest rates at record lows, a return of 7.8 per cent is a lot better than the 2 to 3 per cent that retirees can earn on term deposits.
Financial planners point to a number of ways of reducing assets apart from just spending it on a holiday or replacing the gutters on the house.
Age pensioners are allowed to gift up to $10,000 each financial year without it being counted under the assets test.
A limit of $30,000 can be gifted in any rolling five-year period and the same limits apply whether you are single or a couple.
However, caution should be exercised in depleting assets: "Once it's gone, it's gone," Philpot says.
One thing everyone should do if they have not already is revalue their assets and update the new valuation with Centrelink, Philpot says.
Household items and motor vehicles, in particular, lose market value over time. Many retirees have not reported changes in the value of their household goods for years, he says.
"A lot of those who receive a large pension were probably not too worried about the asset value reported, but now it's worth checking," Philpot says.
Take more risk
Those who have seen their pension reduce should consider taking more risk with their investments.
That is especially so for those who are in "defensive" investments, such as fixed interest and cash, who could increase their allocation to shares, says Phillip Gillard, a financial planner at Shadforth Financial Group.
Returns from "growth" assets, such as shares, are be expected to be higher over the longer term.
However, if share prices fall, they will receive an effective return of 7.8 per cent by way of higher pension payments, Gillard says.
He points out that is on top of a dividend return, including the imputation credits of fully-franked Australian shares, of more than 6 per cent.
Gillard says it's easy to fall into the trap of only monitoring changes in the value of your retirement savings and overlooking the cash flow generated from these savings.
"Fluctuations in capital value can be very unnerving, resulting in many people holding the bulk of their capital in assets like cash and term deposits, which have stable capital values.
"However, what really matters is the ability to maintain your lifestyle for the duration of your retirement and this is driven by cash flow, not the stability of capital value," Gillard says.
The income from "growth" assets such as shares and property fluctuates much less than the capital value, he says.
However, you need to ensure you have a high level of diversification and still have sufficient funds in low-risk assets such as cash and term deposits to fall back upon during those times when share prices fall.
Gillard says holding seven years' worth of living expenses would substantially reduce the need to sell your shares before they recover their value.
"A cleverly structured investment strategy will provide more income and a buffer when shares temporarily fall through a higher age pension and reduce drawdown of your assets.
"If we had a repetition of the past 10 years, including the global financial crisis, you would be better off than sitting in cash and term deposits," Gillard says.
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