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Self-funded retirees ‘dumped’ during COVID-19

They’ve missed out on the financial support of other sectors. Can government help?

National Seniors Australia wants the Federal Government to “get creative” in finding ways to help support all retirees and stop ignoring those who are self-funded and partly self-funded.

Assistance such as one-off stimulus payments for pensioners and increased payments for mature age jobseekers are available but Chief Advocate Ian Henschke says some self-funded retirees are also doing it tough because of the COVID-19 financial hit.

“The government has 'dumped' older Australians who are self-funded and have a difficult road ahead because of the new and weird world of COVID-19,” Henschke told Professional Planner.

“There’s talk of bank shares paying minimal dividends, if any, then there’s record low interest rates and the steep fall on returns in super funds.”

There are three ways the government can give support now by actioning key National Seniors recommendations.

Fix the “broken” Age Pension taper rate

The taper rate is used to determine Age Pension accessibility and has been a particular bone of contention for retirees since it was changed in 2017 from $1.50 to $3.00 for every $1,000 of assets over the relevant threshold.

The change meant more people got the full pension, but part pensions were reduced dramatically.

The taper rate actually reduced total income for retirees with balances between $400,000 and around $800,000.

“The taper rate has distorted the retirement income system,” Mr Henschke says. 

“It’s created a perverse incentive in the retirement income system whereby the ones that have saved more are actually getting less.”

National Seniors calls on the government reduce the taper rate to $2 per $1,000 of assets from the current $3.

Deeper cuts required

While the recent cuts to the deeming rate, which is used to calculate pensions, are very welcome they don’t go far enough.

We want the deeming rate cut back to the cash rate as that would more accurately reflect the true income available to retirees at this time.

The government reduced the deeming rate – used to calculate the estimated earnings on investments – twice already this month by a total of 75 basis points to a rate of 2.25 per cent.

Mr Henschke says the current rate of 2.25 per cent is still too high with the official cash rate at 0.25 per cent.

Pension Loans Scheme

This scheme gives people of pension age the ability to borrow against their home. National Seniors wants the interest on the loan halved, at least.

The rate for the scheme was reduced recently from 5.25 per cent to 4.5 per cent, which Mr Henschke says is not effective enough to make it palatable for older Australians.

“The government should look at halving the rate and making it less unfair,” he says, noting that the government can hardly ask the banks to follow cuts in the official cash rate for home loans when they’re only taking half-measures themselves.

“4.5 per cent is still too high,” he says.

This means self-funded retirees can halve their pension drawdown and supplement their income with loan payments instead of selling assets required to fund a full pension drawdown when market returns are poor.

“Then when they come out the other side they can go back onto their 5 per cent drawdown,” Mr Henschke said.

Broader reform needed

While these are changes that are needed now, National Seniors also believes the time is right for government to start to pursue broader reform of the retirement system.

We are starting a conversation with older Australians about this in Connect and you can read our first article asking whether its time for a universal pension below.

Learn more

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