Financial Planning in Australia 5e Problems Ch18 Page 1

Problems with Guided Answers by Sharon Taylor

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Chapter 18: Social Security

1 Louise plans to retire next month when she is 65 years of age. She provides you with the following details: • single; • homeowner; • motor vehicle, household contents and other lifestyle assets have a market value of $200,000; • cash management trust $50,000; • bank savings account $10,000; • fixed deposits $100,000; and • share portfolio $50,000. Determine Louise’s Age Pension entitlement when she becomes eligible to receive it. Is she assets tested or income tested?

Assessable assets:

Under the Assets Test

• motor vehicle, household contents and other lifestyle assets have a market value of $200,000; • cash management trust $50,000; • bank savings account $10,000

• fixed deposits $100,000; and

• share portfolio $50,000. Total = $410,000

$755.50 – 1.50 / 1,000 (410,000 – 186,750)

$755.50 – 334.88 = $420.62

Financial assets = $210,000

Under the Income Test

Deeming:

3.0% × 44,600 + 4.5% × (210,000 – 44600) = 1,338 + 7,443

= $8,781 per annum or $337.73 per fortnight

$755.50 – .50 (337.73 – 150) = $661.64 Hence, pension payable to Louise will be based on Assets test = $420.62.

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2 From Problem 1 above, estimate Louise’s gross retirement income once she retires. Assume the following annual rates of return apply to her investments at the time of her retirement: Cash management trust 2.0% Bank savings account 0.5% Fixed interest 5.0% Shares 3.5% Income $ Pension 10,936 CMT 1,000 Bank savings 500 Fixed interest 5,000 Share portfolio 1,750 Total

19,186

3 Marjorie, a single homeowner Age Pensioner, has total assessable assets for social security purposes of $280,000, consisting of $100,000 in lifestyle assets and $189,000 of financial investments. Determine her Age Pension entitlement and gross income from all sources, assuming the financial investments earn $10,000 per annum. Assets Test Assessable assets = $280,000 Pension = 755.50 – 1.5 / 1,000 (280,000 – 186750) = $615.63 Income Test Deeming: 3.0 % × 44,600 + 4.5% (189,000 – 44,600) 1,338 + 6,498 = $7,836 pa or $301.38 per fortnight (pf) Pension = 755.50 – 0.50 (301.38 – 150) = $679.81 Hence, pension would be paid under Assets Test of $615.63 pf. Total income = $10,000 + $615.63 × 26 = $34,331.32

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4 A retired couple, Thelma and Ross, are both eligible to receive the Age Pension. They have the following assets which are listed at market value: Cash and fixed interest $125,000 Direct share portfolio $80,000 Listed property trust units $50,000 Motor vehicle and caravan $20,000 Home contents $30,000 Home $450,000 Thelma and Ross also receive income from an immediate annuity purchased 14 months ago. The following details relate to the annuity: Purchase price $60,000 Residual capital value nil Term six years Payments semi-annual Each semi-annual payment is $6,000 The annuity is not an ATE income stream. Calculate Thelma and Ross’s combined assessable income and assets for Age Pension Purposes, and hence determine their Age Pension entitlement. Assessable value of the annuity = $60,000 – (($60,000 – 0) / 6) × 1 = $50,000 Assessable income of the annuity = 2 × $6,000 – $10,000 = $2,000 Financial investments = $255,000 Assessable assets = $305,000 + $50,000 = $355,000 Assessable income (financial investments) = 3.0% × $74,400 + 4.5% × $280,600 = $2,232 + $12,627 = $14,859 pa. The total assessable income = $14,859 + $2,000 = $16859 pa = $648.42 pf. Pension (Income Test) = $569.50 – 0.25 × $(648.42 – 264) = $473.40 pf each. Pension (Assets Test) = $569.50 – ($1.50 / $1,000) × $(355,000 – 265,000) = $434.50 pf each. Age Pension = 26 × $434.50 = $11,297 pa each.

5 Stan and Jane own a house valued at $350,000. They sell their home and decide to give their children $280,000. How will the deprivation rules apply in this case?

They can give $30,000 in a five-year period. Stan and Jane will have a deprived asset of $60,000 in year 1 ($70,000 gift, less the gifting free area of $10,000) that will be counted as

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an asset for five years from the date of the gift and will be subject to deeming.

Example: Jane and Stan gifts o f $10,000 each financial year. • 2012–13: $10,000 within limit

• 2013–14: $10,000 within limit

• 2014–15: $10,000 within limit

• 2015–16: $10,000 deprived asset

• 2016–17: $10,000 deprived asset

• 2017–18: $10,000 within limit

6 An Age Pensioner couple who own their home have $600,000 of assessable assets for Age Pension determination purposes. How much does their combined fortnightly pension increase if they spend $80,000 on home renovations and $20,000 on an annual holiday?

The assessable assets, for social security purposes, reduce by:

$80,000 + $20,000 = $100,000.

The increase in the Age Pension (assuming the Assets Test still applies) = ($1.50 / $1,000) × $100,000 pf each

= $150 pf each.

7 Mark is a non-homeowner and has the following assets: Car $50,000 Boat $30,000 Fixed interest $20,000 Cash deposit $15,000 Shares $100,000 Antiques $700,000 Art $50,000 Calculate his Age Pension under both the Assets and Income Tests.

Assessable assets $ Assets Test

Car 50,000 Boat 30,000 Fixed interest 20,000

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Cash deposit 15,000 Shares 100,000 Antiques 700,000 Art 50,000 Total 965,000 Pension = 755.50 – 1.50 / 1,000 (965,000 – 321,750) = 755.50 – 964.87 = $0 pension

Financial assets = $135,000 Income Test

3.0% × 44,600 + 4.5% (135,000 – 44,600) 1,338 + 4,068 = $5,406 or $194.07 pf Pension = 755.50 – 0.50 (194.07 – 150) = $711.93 However, the Assets Test will preclude Mark from receiving any pension. 8 Geraldine is a single homeowner, age 68, with combined assets of $300,000. This includes investment in shares, motor vehicle, house contents and other assets. Her financial assets amount to $220,000. Assume she purchases an annuity for $60,000. The investment is a 16-year life expectancy product meeting all the required characteristics. Calculate Geraldine’s social security entitlements after purchasing the annuity. Annuity = 60,000 / 16 = $3,750 per annum Financial assets = $220,000 – annuity $60,00 = $160,000 Assessable component of annuity = $3,750 per annum

Deemed income = 3.0% × $44,600 + 4.5% × (160,000 – 44,600) = 1,338 + 5,193 = $6,531

Total assessable income = 6,531 + 3,750 = $10,281 or $395.42 pf

Pension Income Test = 755.50 – 0.5 (395.42 – 150) = $632.79 Assessable assets = $300,000

Pension Assets Test: $755.50 – ($1.50 / $1,000) × $(300,000 – 186,750) = $755.50 – 169.88 = $585.62 Geraldine’s Age Pension will be $585.62 pf and the Assets Test applies.