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Category: Consumer Finance / Markets / Welfare / Federal Government

Pension changes encourage investment in 'risky financial assets'

Thursday, 5 Jan 2017 09:33:41 | Michael Janda

Some part-pensioners have lost their payments due to the new assets test. (AAP)

A leading financial expert has warned changes to the pension assets test are likely to encourage some retirees to make riskier investments or spend their savings more quickly.

From January 1 this year, pensioners are subject to a changed assets test from the Federal Government.

While the new test allows higher asset thresholds before pensioners start losing part of their payments, the rate at which their pension diminishes with each extra dollar of assets has doubled.

Professor Susan Thorp from the University of Sydney Business School specialises in life cycle finance and individual financial decision making, and said the changes will alter behaviour.

"They have the effect of encouraging people to spend their savings more quickly, to dig into their nest eggs more," she said.

"They also have the effect of encouraging them to invest, probably, a little more in risky financial assets."

Pension asset test changes Photo: The asset test changes will see some part-pensioners with higher assets lose their payments. (Supplied: Susan Thorp)

That is because those pensioners with assessable assets (i.e. not including the family home) above the new thresholds, but below the cut-out level, stand to gain twice as much in pension payments for every dollar of assets they get rid of.

"Certainly, as the taper rates increase, the implicit tax on wealth rises," she said.

"It certainly creates an incentive for the people that are affected by it to not add significantly to their wealth and to readjust their affairs in such a way that they've got more wealth that's not assessed and less that is."

Behaviour changes 'matter at the margin'

Professor Thorp said the changes probably will not alter the behaviour of the majority of retirees, but it might matter for those on the borderline of getting a part-pension.

"It's probably not going to have a very large effect - the compensation is quite small," she said, adding that the age pension would rise by $78 per annum for every $1,000 reduction in assets, as opposed to the previous rate of $39.

"But these things matter at the margin - the people that are most likely to be affected are those who are just on the margin of getting or not getting an age pension.

"For them higher assets doesn't make them any worse off because they're not getting an age pension if their assets go up, but if their assets go down they might become eligible, so they're probably going to be encouraged to take on more risk [in their investments]."

In effect, the steeper taper rate on the assets test offers greater compensation for those who suffer financial losses that then make them eligible for a part-pension or for higher pension payments.

While the group of retirees affected now may be relatively small, Professor Thorp said it is likely to grow as future generations accumulate more superannuation.

"As people's accumulations grow, we will see a higher proportion of retirees who will be affected by the means test tapers, but that's going to be happening slowly and for some time it's still going to be far fewer than the majority," she said.

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