Sunday, November 23, 2014

Let's Hit the Road

Kubrick had HAL do wondrous things in Space, but he came adrift, so for our LOPS we are simply going to hit the road with other people's examples to test the Grandfathering Rules of 1 January 2015.

The Supercorp blog says:
"For example, Joe, single, commences a non reversionary account based pension at age 65 on $300,000. Joe’s relevant number is 18.54 and consequently the amount of his yearly pension draw that is treated as a return of capital and not income, is $16,181. Where Joe draws an annual pension of $20,000, then the amount that currently counts towards the Centrelink income test is $3,819.
However, from 1 January 2015, the amount that will be assessed against the income test will be based on the income deeming rule. Consequently, for Joe, where applicable, the amount that counts towards the income test (using thresholds current as at 1 July 2014) is as follows:

  • First $48,000 @ 2% - $960;
  • Balance of $252,000 @ 3.5% - $8,820
Joe’s total deemed income is $9,780 under the new rule. This compares to $3,819 under the current rule. Consequently, the increase in the amount that counts towards the income test may result in a reduction of Joe’s Age Pension entitlements. This will depend on whether Joe’s Age Pension entitlement is determined by the Asset Test or the Income Test.
However, where the pension commenced prior to 1 January 2015 and the pension recipient was receiving age pension entitlements, the current income test rule will be grandfathered for that pension, whilst it remains in place. Consequently, care needs to be taken when considering any refreshing or “sweeping” of the pension or changing the pension provider, as this may result in a new pension being commenced and the post 1 January 2015 rule applying."

So we have "put a face" to Joe to see what a typical Joe might do as a Retirement Plan based on 20 years and not on the typical One Year Wonder we see here.
For year #1 our Joe is getting 98.9% of the Maximum Age Pension if he stays on Grandfather Rules and that reduces to 85.9% under the New Rules, so for year #1 Supercorp is correct in backing Grandfather.  Over 20 years the New Rules give 81.44% and 87.99% for Grandfather, so even THAT is correct within the confines of this dumb "plan".

Grandfather Rule

New Rule

But as we now know "that is not what ships are built for" [ie if Joe dies as govt expects at 85 he has 34% MORE than he started with and his 20 year retirement was frugal to say the least] and as we will see Grandfather simply puts fetters on any sailing plans.

So we ask the LOPS to tell us how much Joe should Drawdown from HIS Super proceeds to suit HIS Retirement, ie exhausting his funds after 20 years [when Govt says he should be dead].

The answer is $30,490 pa Drawdown and here are results:

Grandfather Rule Testing

Joe now gets just 75.59% of the Maximum, ie $349,037 over 20 years in Age Pension.

New Rule Testing

But under New Rule Joe gets 93.65% which is $432,439 over 20 years in Age Pension, and his Total Income Stream is about $50,000 for each year, so Joe moves out of the Poverty Trap his One Year Wonder had him in at about $38,000 pa, missing out on $56,404 from Centrelink, but at least dying with $402,021 in his "pocket".

I think if we asked a thousand Joes [and especially Joannes] which Plan they would rather IF they were actually SHOWN these figures, at least 999 would take the LOPS Plan over the One Year Wonder Plan.

Attempted Explanation

Ozzie Osbourne of Black Sabbath had it all figured out about "Big Brother" in Sabbath Bloody Sabbath

"Nobody will ever let you know,
When you ask the reasons why.
They just tell you that you're on your own,
Fill your head all full of lies.
You bastards!"

So the purpose of the LOPS is simply to SHOW you the figures for YOUR situation and let YOU decide how to plan YOUR Retirement.

As to the mathematics, an inspection of the graphs above will simply prove to you that the Grandfather Rules had huge whiskers and HAD to be changed for "legal reasons", but the Big Issue is the MANNER in which it was done.

So best to start a new post on the Politics, safe in the conclusion that this example simply confirms what the other examples tell us, ie there is a strange smell in Denmark.

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