A hot topic in America right now is the "great resignation", also called the "great retirement," as older people leave the workforce in droves.
The same thing is happening in Australia, as baby boomers decide there is more to life than working for a boss. But right now, Australia is also facing a critical shortage of workers.
One possible solution being talked about is encouraging age pensioners to return to the workforce to help pick up the slack. After all, retirees are often skilled workers.
But proponents of this solution point out that the system is biased against pensioners, who can end up losing up to 70 per cent of any extra money they earn.
That's true, but fortunately, it's not true in all cases - the issue is not a simple one because of the interplay between the assets and income tests.
Let's look at two age pensioner couples, both homeowners, to get an idea of the way the system works.
The first couple has $405,000 in assessable assets, which is the bottom threshold for the assets test, so they are income-tested. They receive the full pension of $729.30 a fortnight each.
They can earn $320 a fortnight combined from their investments and maintain the full pension, but above that point they would lose $0.50 in each additional dollar.
In addition, Centrelink's work bonus enables them to earn an extra $300 a fortnight ($7800 a year) each from employment or business activities, and still remain eligible for the whole pension. This means the couple could earn an extra $15,600 a year without reducing their age pension.
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Now let's look at income tax. Their pension of $18,954 a year each is taxable, as is their investment income (Centrelink is almost certain to be deemed income for their investments), unless it is in superannuation, in which case it is not added to their taxable income. The $7800 each they can earn is also taxable, but thanks to various offsets, a couple can earn $29,783 a year each tax-free.
Here's where it gets tricky. Their pension plus the $7800 work bonus is just $3000 under the point where the offsets start to reduce, so a pensioner who wanted to earn a further $10,000 a year would certainly cop the double whammy of a 50 per cent in the dollar pension reduction plus some tax. Depending on the extra income they could pay a total of 69 per cent tax on that extra income - the technical name is the effective marginal tax rate (EMTR).
The second couple has $700,000 in assessable assets, of which $650,000 is in superannuation, which does not give rise to a tax liability per se. Their pension is $286.80 each fortnight because they are assets-tested (it produces the lowest age pension). Their superannuation of $650,000 will be assigned a deemed income of $12,845 a year.
At that asset level they could earn a combined annual income of $57,200 with no effect on their pension. When we deduct their deemed income we can see that they are left with the space to earn an additional $44,355 a year between them with no effect on their pension.
They can also earn another $7800 under the work bonus scheme with no effect on their pension. There may be a small amount of tax on their total earnings, which does include the pension.
It's obvious the present system favours the well-off: they can find extra work and earn up to $52,000 with no adverse effect on their pension. Those at the poorer end of the scale are restricted to around $18,000 a year. This begs the question as to how this anomaly can be fixed.
Solutions include making the pension income-tax free up to a certain threshold, and/or increasing the work bonus.
One thing is clear - to increase the workforce participation of elder Australians - we need to make the system clearer and fairer. They need it and the country needs them.
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Noel answers your money questions
I gave my 14-year-old grandson some money as a gift. Because it was a share portfolio the income including franking credits is now over the $416 a year mark where the punitive children's tax cuts in. Can he make a personal contribution to super and claim a tax deduction for it, and thereby eliminate the tax on this "unearned income"?
You have highlighted potential problems when making gifts to minors. Unfortunately, a tax deduction for superannuation contributions is only available for people who are earning ordinary assessable income. For example, if he had a casual job, a personal contribution may offset some tax from that source. However, it cannot be intermixed with "unearned income". So, he cannot do it. I think a bigger issue is whether someone of that age should be placing money into superannuation where it would be inaccessible for at least 50 years. There are bound to be many rule changes in that time.
I am 61 and looking to transition to retirement as work is getting harder to find. I live in the country and my wife has fulltime work but I travel and live in my caravan to stay working. My wife suggests selling our home to our son at $100,000 under market value (with conditions that we stay until unable to look after ourselves) and putting aside $200,000 to split for my two daughters, and I retire on the remainder until I can get my super and pension. Do you think this plan is feasible?
There could be some complications. If you dispose of assets at less than their market value, the difference will be counted as an asset and deemed for income by Centrelink for five years from the date that happens. Furthermore, if you make an arrangement such as you have written about with family members, it could all become unstuck if there is a relationship breakdown, and the family members and their partners start arguing about the assets.
My wife and I have small government part-pensions and returns from a pension fund in my name. Our home is in joint names. Recently a friend died and like me his finances, including a credit card, were in his name. His wife, although a secondary on the credit card, could not use the card which was cancelled by the bank upon his death. His wife had difficulty accessing funds to live on while the estate was in probate.
My wife, who is a secondary cardholder for a credit card in my name, asked our bank for a credit card in her own right, which she would use in an emergency if I died. The bank refused as she did not earn enough to qualify - most of our income is from the pension fund in my name.
How can we arrange our affairs so my wife can get a credit card in her name to use in the event of an emergency such as my death?
I accept the fact that obtaining a credit card has become extremely difficult for people who are retired. However, the simple solution is a debit card in your wife's name which has no annual fee and can still be used to make purchases.
The good news is that you can never get a shock when the credit card statement comes in because all a debit card can do is access money already held in your bank account. The only bad news you won't accrue any loyalty points, but these have been devalued so much in recent years that it's not worth worrying about.
I appreciate that you may need a credit card for hotel bookings, but you can often get around that by using a travel agent, and prepaying your travel costs. I reckon there is a big opportunity here for a lending institution to offer a credit card with the criteria is based on merit.
Once you commence drawing down from your account-based pension are you allowed to contribute part of the unused drawdown amount back into an accumulation account to further grow the super balance?
You cannot make contributions to a fund in pension mode, but you could certainly make contributions to a separate accumulation fund provided you can pass the age limit test, and your total super balance (including your existing pension fund) is less than $1.7 million (if making after-tax contributions).
Just keep in mind that money in the accumulation phase pays tax on its earnings of 15 per cent flat from the first dollar the fund earns - due to a combination of various offsets most retirees can hold a substantial sum in their own name and still stay in a zero-tax environment.
I have six children all with families. This Christmas I want to give them cash as a present. $5000 per family a total of $30,000 distributed to a total of 20 people for Christmas. Could this affect my pension?
There may be an immediate effect on your pension. If you give away more than $10,000 in a financial year, the balance of $20,000 will be held as a deprived asset for five years from the date of the gift, and counted as an asset and deemed under the income test.
Therefore your pension may be less than it would have been if the money was gifted within the rules. A simple method may be to give $10,000 before June 30, 2022 and make the remaining $20,000 as loans.
On July 1, 2022 you could forgive $10,000, and on July 1, 2023 forgive the remaining $10,000. This strategy will ensure that your pension is increased to take account of the reduction in your assets in a reasonably short time.
- Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance. Email your money questions to firstname.lastname@example.org