The age pension means tests - Actuaries · 2018. 5. 7. · The age pension means tests 6 / 42 2.3...

The Age Pension means tests:

contorting Australian retirement

Anthony Asher & John De Ravin 2018 Anthony Asher & John De Ravin

Abstract

Most Australian retirees are likely to be subject to the Age Pension assets or

income test at some point. There is evidence is that many retirees significantly

adapt their consumption to increase their Age Pension entitlements, but the

long-term implications are very difficult to determine – even if the current rules

were to remain in place. Our paper evaluates the current approach to means

testing against the principles set out in the Department of Social Services

discussion paper covering the treatment of the new innovative income

streams. We evaluate the implied “effective marginal tax rates” (EMTRs) on the

assets of part pensioners who are subject to the assets test. We find that

depending on a variety of parameters such as assumed future earnings rates,

demographic status, drawdown strategy and the base level of assets held, the

EMTRs are high enough to explain material distortions to savings decisions of

those still in employment, and distortions in the spending and investment

decisions of retirees. Optimal decisions in this context require contorted

retirement strategies that do not appear to be in the national interest.

However, it seems to be difficult to develop remedies that would be easy to

implement politically. Some possible remedies are suggested, and those in

positions of influence are challenged to make a stand for sensible reform,

which should include incorporating the value of the principal residence within

the assets test.

Keywords: Assets test; effective marginal tax rate; Age Pension; taper rate.

The age pension means tests

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CONTENTS

1 Introduction ....................................................................................................... 3

2 The Age Pension and means tests ....................................................................... 4 2.1 THE AGE PENSION................................................................................................................. 4 2.2 HISTORICAL DEVELOPMENT OF THE MEANS TESTS ....................................................................... 5 2.3 DESCRIPTION OF CURRENT MEANS TESTS ................................................................................... 6 2.4 EVALUATION CRITERIA ........................................................................................................... 8

3 Housing .............................................................................................................. 8 3.1 POORER RENTERS .................................................................................................................. 9 3.2 RICHER HOME OWNERS .......................................................................................................... 9 3.3 THE RIGHT TO HOUSING SECURITY AND “FUNGIBILISATION” ........................................................ 10

4 Integrating the Superannuation and AP systems ............................................... 11 4.1 CONCEPT OF EFFECTIVE MARGINAL TAX RATES (EMTRS) .......................................................... 12 4.2 THOSE WHO DO NOT DRAW DOWN ........................................................................................ 12 4.3 DEFINITION OF “LIFETIME EMTRS” AND APPROACH TO CALCULATION ......................................... 13 4.4 ASSUMPTIONS .................................................................................................................... 15

5 Results.............................................................................................................. 15 5.1 ALTERNATIVE STRATEGIES ..................................................................................................... 16 5.2 ANALYSIS OF EMTRS FOR SMALL TRANCHES OF INCREMENTAL ASSETS ......................................... 17

6 Evaluation ........................................................................................................ 20 6.1 EVALUATION AGAINST THE CRITERIA. ...................................................................................... 20

6.1.1 Neutrality ............................................................................................................ 20 6.1.2 Equity .................................................................................................................. 20 6.1.3 Integrity ............................................................................................................... 21 6.1.4 Resilience and fiscal sustainability ...................................................................... 21 6.1.5 Simplicity ............................................................................................................. 21

6.2 PERVERSE INCENTIVES .......................................................................................................... 22

7 Remedies.......................................................................................................... 23 7.1 REVERT TO FORMER ASSET TEST TAPER RATE ............................................................................ 23 7.2 ABOLISH THE ASSET TEST AND CONVERT SUPERANNUATION INTO AN INCOME STREAM .................... 23 7.3 PERSONAL RESPONSIBILITY AND POLITICAL GAMES .................................................................... 25

8 Conclusion ........................................................................................................ 25

9 References ........................................................................................................ 25

APPENDIX 1 Detailed results (for Figure 2) ……………………………………………………..27

APPENDIX 2 Detailed results by asset tranche ………………………………………………..31


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1 Introduction

The objectives of this paper are:

1. To note some aspects of the design of the current means testing for the

Age Pension which might be regarded as inappropriately discriminatory

as between individuals in different circumstances;

2. To evaluate the Effective Marginal Tax Rates (EMTRs) that apply to Age

Pensioners who are subject to the Assets Test;

3. Given that some of the EMTRs are very high, to consider some of the

(possibly unanticipated) implications for the consumption/savings

decision during Australians’ careers, as they approach retirement and

after they retire; and

4. To suggest possible alternative designs for the means test which would

not suffer from the same extent from the deficiencies of the current

design and parameters.

This paper proceeds as follows.

In Section 2, we summarise the history of the Age Pension (AP) and means

testing in Australia and describe the current means testing structure and

parameters. In particular we note the increase in the Assets Test taper rate that

occurred with effect from 1 January 2017. We also briefly touch on

international means testing arrangements. Finally, we list the criteria, specified

by the Department of Social Security (2016), against which the Department

believes the current means testing arrangements (including the treatment of

insurance products such as annuities and deferred annuities) should be judged.

In Section 3, we consider the treatment of home ownership in the means tests,

and note a serious inequity that arises form the exclusion of the principal place

of residence from the assets test. We consider some possible defences for the

current approach, but find little merit in them. We note that the current means

testing treatment of the home could be adapted to a much more equitable

approach at little or no net cost to the revenue.

In Section 4, we consider the integration between the superannuation and

means testing systems. We explain the concept of EMTRs not as “tax rates” as

such but by reference to welfare entitlements foregone as a result of owning

marginal assets. We note the “asset test trough”, that is, the fact that more

assets within the asset testing range generally implies less total income. We

define “lifetime EMTRs” as the present value of age pension foregone as a

percentage of marginal additional assets held at the date a person becomes

eligible for the AP. We note that EMTRs are a function of demographic status

(male/female, single/couple) and the base level of wealth at the date of AP

eligibility, as well as of the drawdown strategy pursued by the pensioner(s). We

explain our approach to the calculation of EMTRs for some particular


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drawdown strategies and we list the AP parameter assumptions that we have

adopted throughout the paper.

Section 5 presents our results. Section 5.1 makes the point that the AP foregone

varies dramatically according to the strategy adopted by the pensioner. There

is a strong incentive to gift assets in excess of the lower asset test threshold 5

years prior to AP eligibility age (the 5-year window is to avoid the “deprivation”

rules). Section 5.2 explains how EMTRs have been calculated for a range of

asset levels, allowing for a range of real interest rates, drawdown strategies and

demographic statuses.

In Section 6 we evaluate the current means testing processes against the

Department of Social Security criteria. We find that none of the DSS criteria are

satisfied.

Section 7 outlines a remedy for the current unsatisfactory situation and Section

8 provides an extremely brief summary of the key findings of the paper.

This paper is an extension of Asher (2017), a public submission in response to the

Department of Social Services (2016) discussion paper. Quotations from the

earlier paper are therefore not marked.

2 The Age Pension and means tests

The first pillar of Australia’s retirement income system consists of the Age Pension

(AP), a welfare benefit that is means tested and funded from general

government revenue. There are currently two separate components of the

means tests, the income test and the assets test, and homeowners are treated

differently from non-homeowners. The means test rules are Byzantine in their

complexity and change frequently – sometimes with considerable effects on

some groups of pensioners. The following description omits many details on the

grounds of immateriality.

2.1 The Age Pension

The AP dates back to Federation in 1909, the amounts being shown in Figure

2-1. It has more or less increased in line with average wages, with a particular

boost under the Whitlam government of the early seventies. Relative to

minimum wages, it has approximately doubled over the past century, which

means that pensioners are better off relative to workers on lower incomes. This

shift has partly been a response to old age poverty, but may also reflect the

relative political influence of these two groups.


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Figure 2-1 History of the AP and means tests – for married couples1

2.2 Historical development of the means tests

Figure 2-1 also traces the development of the income and asset test free limits

over the century. The two tests were merged between 1961 and 1985. Before

1969, pensions were not payable to those over the means test free limits,

although between 1953 and 1971 assets were converted into income at a rate

of 10%.2 It can be seen that some of those in this position were worse off than

those on the AP. The EMTR was infinite at the means test limit.

From 1969, taper rates of 50% have applied on income except for a period

from 2000 to 2009 when they were reduced to 40%. The taper rate on the asset

test seems to have been set at 7.8% except from 2007 to 2016 where it was only

3.9%.

1 The calculations were performed by the authors and are based on our reading of the

data available at http://guides.dss.gov.au/guide-social-security-law. Given their

complexity, it is likely that we have not fully understood some of the rules.

2 http://guides.dss.gov.au/guide-social-security-law/4/10/1/20

http://guides.dss.gov.au/guide-social-security-law


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2.3 Description of current means tests

The current AP for a married couple owing their own home is slightly in excess of

$35,000 per annum, reduced by 50% of income over $7,800 pa or by 7.8% of

assets over $380,000 if higher. For the income test, financial assets in excess of

$83,400 are deemed to earn only 3.25%pa; the first $83,400 of financial assets

are deemed to earn only 1.75%pa. Single pensions are a relatively generous

66% of those paid to a couple.

Those who are renting qualify for rental assistance of $3,500 for singles but –

strangely – only $3,300 if a couple. The asset test limits for non-homeowners are

also some $200,000 higher than for non-homeowners.

The Australian means tests appear to be particularly complex and Australian

pensioners on a wider range of incomes and with a wider range of assets are

affected by the taper rates under the means tests than pensioner residents of

other countries. The two graphs shown in Figure 2-2 show that the Australian AP

is the highest proportion of average wages of any of the countries shown, and

our two means tests affect many more people.

The Department of Social Services (2016) explains and justifies the means tests

thus:

The primary policy objective of the means test is to equitably and fairly

target income support to those people who are most in need. This helps

to ensure that the system remains sustainable, both fiscally and in terms of

community support. The means test also represents an expectation that

people will draw upon their own income and assets to support themselves

in retirement. The means test functions to assess a person’s overall

capacity for self-support and target social security expenditure according

to need. …

Means testing also provides incentives for self-provision in the form of

participation and saving. The means test balances these objectives by

the use of income and assets free areas and the tapered withdrawal of

payment as a person’s assessable income and assets increase.


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Figure 2-2 Design of international income and asset tests (from Chomik et al (2015))


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2.4 Evaluation criteria

The Department of Social Services (2016) discussion paper also lists the criteria

against which the current means testing system should be judged. Those

principles need to encompass the treatment of a variety of types of asset

(especially annuity and deferred annuity products) as well as financial and

other investments and physical assets.

Neutrality – the means test assessment of investments should not

advantage a particular type of product or provide an incentive for

people to invest in a particular asset …

Equity – the rules should treat people with similar means in a consistent

way (horizontal equity) and those who have a greater capacity to self-

provide for their retirement should receive lower income support

(vertical equity).

Resilience – the rules should be able to apply to a range of products,

including new products, without diminishing neutrality and equity …

Integrity – the rules should ensure the social security system remains

targeted to assisting those people who need support and that people

cannot maximise their Age Pension by engaging in strategies that

minimise the extent to which their own income or assets are counted in

means test assessments.

Fiscal Sustainability – the means test treatment of new retirement income

stream products should have regard to the cost of the social security

system.

Simplicity – the rules should be easy to understand for income support

recipients, financial advisors and income stream providers.

Complicated rules can result in people making poor financial decisions.

Simple rules support people to make good decisions.

We have no argument with these principles. This paper, however argues that

the assets test is especially inequitable to the cautious who retain assets for

precautionary purposes; makes planning extremely complex; and significantly

distorts the investment and drawdown behaviour of many retirees. It therefore

fails all the policy principles except possibly that of fiscal sustainability. There

are alternative approaches that could better meet these principles including

fiscal sustainability.

3 Housing

While not the main point of this paper, the difference in treatment between

home-owners and renters is egregiously inequitable and needs to be

mentioned first as it would not be complex to address, and the adjustment

could be performed in a manner which would be revenue-neutral.


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3.1 Poorer renters

The pressing issue is the dire position of those who neither own their own home

nor have access to social housing. Given that Hulse et al (2014) reported that

only 10% of properties (200,000 units) had rents of less than $10,000 annually in

2011, rent assistance of $3,500 pa places considerable financial stress on those

non-homeowners with limited other resources, many of whom are reduced to

poverty or homelessness. Farnsworth (2016) reported:

Unpublished data from the Australian Department of Social Services shows

32,000 homes, where people are aged 65 and above and receiving rent

assistance, are paying unaffordable rents in NSW.

It is a 50 per cent rise in the past five years and includes 9,000 people, 65

and over, who are paying more than half their income on rent.

Given that there are some 1.2 million people over 65 in NSW, this implies that

about 2.5% of the aged population face the problem – 90,000 country-wide.

The NHSC (National Housing Supply Council) (2010) projected that there would

be 220,000 pensioners in private rented accommodation by 2018, so this

number seems reasonable. We make no detailed calculations as to precisely

what would be fair, but suggest that the amount should be more or less

doubled. While $6000 pa is not enough to fully cover rent, homeowners do

face significant costs that would have to be taken into account in detailed

modelling. Doubling rent assistance to pensioners not in social housing would

cost less than $200m, which is close to 0.25% of the cost of support to the

aged.3

3.2 Richer home owners

At the other end of the financial spectrum, the exemption of the home from

the asset tests means that there may well be as many pensioners receiving the

AP while living in multi-million dollar houses.4 Particularly given that dwellings

and land represents over 50% of the household balance sheet5, an exemption

seems myopic and distorts financial planning, spending, investment and the

price of housing. (Sane and Piggott, 2008; Bradbury, 2010).

The DSS discussion paper justifies it so:

“The exemption of the principal residence from the assets test recognises the

greater financial security that pensioners have if they live in their own home

and importance placed on the family home in Australian society.”

3 2.5% * 3.6 million people * $3000 * 2/3 households per person

4 https://www.domain.com.au/news/whopping-78-sydney-suburbs-pass-2m-median-

house-price-mark-20170422-gvokv1/

5 ABS 5204 Table 41


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While these assertions are clearly true, the rational conclusion would be to

include homes in the assets test rather than exclude them precisely for these

reasons. Home ownership does provide financial security so those who rent

need to be given more, while those who obviously have secure lodgings need

less social support. The “importance of the family home” emphasises this. For

many, however, the “family home” has three empty bedrooms and is

crumbling around the surviving parent, who is increasingly unable to manage

the activities of daily living, let alone maintain the house. But the homeowner is

not willing to downsize to a less expensive and more manageable property,

sometimes for psychological reasons but often also because of the negative

impact on their main source of income, the AP.

Each of the criteria mentioned in section 2.4, except perhaps simplicity,

demand the inclusion of the principal residence. The arguments against ignore

the disadvantages faced by renters. Homes provide an imputable rent and

the AP should be adjusted if pensioners decide to spend more on it.

The need to include the value of the house in the asset test has been

recommended by almost all who have considered the question. Johnson et al

(2016) refer to eight different reports in as many years: the Harmer Pension

Review, the Henry Review, a Grattan Report, three Productivity Commission

reports, Rice-Warner and the National Commission of Audit. It seems

overwhelmingly clear that affordability issues should be addressed in the first

place by including the value of the home.

3.3 The right to housing security and “fungibilisation”

There are however two reasons to distinguish one source of wealth from

another. The first is the basic human right of housing security; the second is

fungibility. These two can explain much of the visceral response of some

people when suggestions are made to include the home in the means tests.

The right to housing has a simple logic: if people do not have their own place,

they must occupy someone else’s. This right must include some security of

tenure to be meaningful, and without some security and protections for both

renters and owners the incentive to care for and improve the place is absent.

Addressing the lack of security enjoyed by renters is the subject of another

debate. Those interested in some of the theoretical and political controversies

might like to refer to Hayward (1986), for example.

The problem of fungibility is that the home cannot easily be turned into income.

Conventional reverse mortgages are relatively expensive and, given the

normal operation of compound interest, may lead to significant reductions in

the net residual value of the home which might constrain future choices if the

borrower wishes to move into other accommodation. There is also a

government scheme (the “Pension Loans Scheme”) that lends the AP shortfall


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to part pensioners.6 The interest rates charged are a little lower than

commercial reverse mortgages but more restrictions apply to eligibility and the

manner of drawdown of funds. .

If the value of the home is to be included in the means tests, then the lack of

fungibility means that some pensioners at least will be worse off. Johnson et al

(2016) refers to a growing consensus of the need for effective instruments to

address the issue of fungibility, and refers to some commercial schemes

including those that share capital appreciation.

Careful consideration would need to be devoted to transitional arrangements

so that inclusion of the home (or the excess of the value of the home above

some threshold value) does not bear unreasonably harshly on those pensioners

who have already retired, in the expectation that the current means testing

rules will continue to apply (perhaps with slight adjustment to parameters)

throughout their retirements. One possibility would be to substantially extend

the eligibility for the Pension Loans Scheme, so that those who own their own

homes but few additional financial assets can still access the full AP, with fewer

constraints (Loan to Valuation Ratio, etc.) than currently apply, with any excess

of the accumulated loan value being recovered from the estate or on sale of

the home.

4 Integrating the Superannuation and AP systems

The AP and the superannuation system are two pillars of almost every

Australian’s retirement. The first provides a base, supplemented and then

replaced by the second as financial resources increase. The key issue

addressed by this paper is the way by which the AP is reduced. As will become

clear in this section, the issue is not simply the “taper rate” (the rate at which

the AP is reduced in relation to assets held above the lower assets test

threshold), because the long-term effects are very different for different

approaches to drawdown.

We take it as given that the objective of the superannuation system is to

provide for consumption in retirement, and that the AP supplements this for

those who do not have the means to support themselves. One important

consequence of this is that superannuation benefits are to be seen as a

mechanism for supporting the lifestyle of retired Australians, not as a

mechanism by which the real capital value of a pensioner’s estate is

maintained or grown, to be passed to non-dependants. The current

dominance of account-based pensions does not achieve this result, and we

could argue that the pooling of longevity risk should be encouraged by the

6 https://www.humanservices.gov.au/individuals/services/centrelink/pension-loans-

scheme


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means tests. This is however not the main thrust of this paper, which is the

unfairness and distortions created by the asset test.

4.1 Concept of Effective Marginal Tax Rates (EMTRs)

In each case, we consider the marginal losses to AP entitlements that arise from

having assets over the thresholds. We refer to these as EMTRs. Legally, the

tapers in the AP are not really “taxes”, but given that money is fungible, the loss

of social security entitlements caused by having additional assets is effectively

the same as a tax.

4.2 Those who do not draw down

Figure 1 below illustrates EMTRs for those who retain the assets. It applies at any

one time, and would apply over a lifetime to a single person who only spent

their investment income and who was earning a real rate of interest of 3% and

another earning 5%. The assets test creates a trough in income between about

$300,000 and $700,000 in assessable assets. Within the assets testing range

where the assets test produces a lower AP entitlement than the income test,

annual income declines with increasing assets because the income from the

marginal assets (whether returning 3%pa or 5%pa) is less than the AP foregone,

which is 7.8%pa.

Figure 1 For those who retain assets

The calculations above do not consider any investment volatility. A more

complete picture may be obtained by considering the impact of holding


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additional assets at the point of retirement, considered over a retiree’s lifetime,

depending on the various drawdown strategies that the retiree might adopt.

4.3 Definition of “lifetime EMTRs” and approach to calculation

We should expect AP foregone over time to vary according to:

Assumed future real rates of investment return on assets

Drawdown strategy adopted

Demographic status (single male/single female/couple)

Initial level of assets held

Therefore the purpose of our calculations it may be helpful to define “lifetime

EMTR” as follows:

“Lifetime EMTR” = {PV(AP; $X; DS) – PV(AP; $X+δ; DS)} / δ

where:

$X is the base level of assets held when the pensioner first

becomes eligible for AP

$δ is an incremental amount of assets in addition to $X

hypothetically held when the pensioner first becomes eligible

for AP

DS refers to a specified Drawdown Strategy

PV(AP; $X; DS) is the present value of AP received over the lifetime of the

single of couple pensioner assuming initial assets of $X and that

the pensioner follows drawdown strategy DS

In other words, the “Lifetime EMTR” is the present value of the future loss of AP due to holding additional assets $δ at age pension eligibility age, as a

percentage of those additional assets. A “lifetime EMTR” of zero means that the pensioner has incurred no loss of AP as a result of holding an additional $δ

of assets, but a “lifetime EMTR” of 100% would mean that the pensioner has effectively received no net value from the additional $δ of assets.

For some of the results in this paper (especially in Section 5.1 below) we have taken $X to be the lower assets testing threshold and $δ to be the width of the

asset testing range, so that the EMTR is the impact of holding additional assets

equal to the width of the asset testing range, relative to holding assets of an

amount equal to the lower assets test threshold at the age when the pensioner

becomes eligible for AP.


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For the purposes of the results calculations referred to in Section 5.1 below,

which are based on the projections in Appendix 1, the EMTRs have been

computed using the Australian Life Tables 2010-2012 (Females).

However, we have also performed a set of calculations for smaller tranches of

incremental assets, for drawdown strategies in the following specific forms:

1. Asset drawdown each year is the SIS minimum % of beginning of year

assets. Variants of this strategy for which we also calculated EMTRs were

where annual consumption expenditure is:

a. the SIS minimum % + 1% of beginning of year assets;

b. the SIS minimum % + 2% of beginning of year assets;

c. the SIS minimum % + 3% of beginning of year assets;

d. the SIS minimum % + 4% of beginning of year assets; and

e. the SIS minimum % + 5% of beginning of year assets;

2. Asset drawdown each year is a fixed % of beginning of year assets. The

fixed percentages for which we evaluated EMTRs were varied from 5% to

15% in multiples of 2.5%.

The asset testing range for a single pensioner is approximately $300,000 in total width (from $253,750 to approximately $552,000). We have taken $δ for single

pensioner calculations to be $100,000, and have therefore calculated three

separate EMTRs for the asset testing range. Similarly the asset testing range for pensioner couples is very nearly $450,000 in total width and we have taken $ δ

for calculations involving couples to be $150,000.

In total we have done six computations of EMTRs for each drawdown strategy,

demographic status and rate of real investment return considered, reflecting

marginal lifetime losses of AP from holding an additional $100,000 of assets (for

singles, and $150,000 for couples) at the date of becoming eligible for the AP.

Three of the calculated EMTRs apply within the asset testing range and three to

assets in excess of the asset testing range but where the additional assets held

will result in the loss of AP not immediately, but after a period of time when the

assets are depleted to an amount within the asset testing range.

The table below shows the parameters for each of the six sets of calculations.


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Singles ($000s) Couples ($000s)

X δ X δ

Lower third of assets test range 253 100 380 150

Middle third of assets test range 353 100 530 150

Upper third of assets test range 453 100 680 150

First layer above upper limit 553 100 830 150

Second layer above upper limit 653 100 980 150

Third layer above upper limit 753 100 1,130 150

The results of these detailed EMTR evaluations are reported in Section 5.2 below

and the detailed results of all calculations are shown in Appendix 2.

4.4 Assumptions

The following table summarises the assumed AP parameters that we have used

throughout this paper.

AP projection assumptions

AP Single 23,254

AP Couple 35,058

Lower AT Threshold Single 253,750

Lower AT Threshold Couple 380,500

AT Taper Rate 7.80%

Lower deeming rate 1.75%

Higher deeming rate 3.25%

Deeming threshold - Single 50,200

Deeming threshold - Couple 83,400

Income test threshold single 4,368

Income test threshold couple 7,800

Income test taper rate 50%

Also implicitly we have assumed, by using a real rate of investment return

(where by “real” we mean relative to AWE) that future rates of AP payment will

be indexed to AWE and also that future lower and upper thresholds for the

assets test and income test will also be indexed to AWE. Current practice is for

AP payment amounts to be indexed normally to AWE but threshold amounts

are indexed to CPI (though the amount of the thresholds may from time to time

be materially adjusted); nevertheless for simplicity of calculation, both payment

amounts and thresholds have been assumed to be indexed to AWE.

5 Results

As noted in Section 4.3 above, we have performed several sets of projections

and we include two main sets of results in this paper. The results described in


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Section 5.1 below are derived from the projections in Appendix 1 and

summarised in Figure 2. The results described in Section 5.2 below are derived

from a separate Excel workbook and the results are summarised in Appendix 2.

5.1 Alternative strategies

Figure 2 below shows the lifetime effects (until age 109) of the various strategies

described below for a single pensioner. We have assumed assets exactly

equal to the top of the asset test level, which produces the largest impact – for

illustration purposes. The Appendix gives details of the results.

Figure 2 Alternative retirement consumption patterns

If the pensioner draws down the minimum permitted by pension

regulations, her spending is shown as the Minimum drawdown line in

Figure 2. This is the strategy we understand is adopted by approximately

half of pensioners, and could be considered the benchmark. Her

spending pattern is however totally inappropriate - starting at $28000 pa

at 67 and rising to $48000 at 85 before declining again. The value of her

assets at the beginning of retirement is shared into roughly equal thirds:

one to herself, one to her heirs, and one in fiscal savings. The EMTR for

savings subject to the asset test is 66%. That means tests are structured

to permit the heirs to inherit a third of the superannuation benefit,

represents a failure of the system.

If at 62, she gives away enough of her assets to escape the asset test

altogether, her share drops slightly to 29%, and the effective tax rate

drops to 2% (via the income test)), while the heirs obtain 69% - $260,000


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immediately. This is the most fiscally efficient for the pensioner and

family – and is illustrated by the dashed Give away line. Rather than

given away, the money can be invested in the family home – or spent

before pension age – which would allow the pensioner to directly enjoy

98% of her savings. At 67, her income is $6000 pa (20%) higher than if she

had not given the money away. This amount falls slightly after the mid-

eighties but it is appropriate.

Another alternative is for the pensioner to spend the money after

retirement in order to maintain the ASFA comfortable lifestyle for as long

as possible. She enjoys a 50% higher standard of living than the

benchmark, and remains above it until her early eighties. Her share of

her savings rises to a little over 50%, with her heirs and fiscal savings

sharing the balance. The income is shown in the Comfortable line in

Figure 2. The EMTR for savings subject to the asset test is therefore 52%.

A “level” annuity throughout life produces a rising Age Pension for ten

years (at which point the deemed assets fall below the lower asset test

threshold), as in the dotted and dashed line. A final alternative therefore

incorporates a level annuity plus an allocated pension that together

produce a level spending pattern in retirement. The total income and

the amount provided by the annuity plus Age Pension is shown by the

unbroken Modified annuity lines. The present value is shared 71% to the

pensioner, 1% to the heirs (from the allocated pension). The EMTR for

savings subject to the asset test is 45%.

5.2 Analysis of EMTRs for small tranches of incremental assets

In addition to the broad calculations of EMTRs referred to in Section 5.21 above, the authors computed EMTRs for smaller values of δ ($100,000 for singles and

$150,000 for couples). The objective of these calculations was to gain

additional insight into the extent to which asset-testing rules impacted EMTRs as

a function of base asset levels, investment returns and drawdown strategy

combinations.

For these more granular calculations a slightly different approach was taken to

mortality assumptions than in the calculations underlying Appendix 1 and

Section 5.1. In particular it was assumed that a single female would receive AP

for 25 years and a single male would receive AP for 22 years. These durations

are slightly higher than the life expectancies for a 65 year old according to ALT

2010-2012, which are 22.05 and 19.22 years for females and males respectively.

However actuaries will be well aware of the trend to improving mortality so that

firstly, current age-specific mortality in Australia is likely to be lower than

mortality rates that applied during the 2010-2012 triennium, and also on the

(very reasonable) assumption that mortality rates continue to decline in future,

65 year old Australians will live longer than current cross-sectional mortality rates

would imply. The authors consider the life expectancies of 25 and 22 years for

females and males attaining age pension eligibility age, to be reasonable.


18 / 42

For couples, it was assumed that the couple rate of pension would be payable

for 22 years, and the single rate for a further 5 years. (The use of 5 years rather

than 3 years is an approximate allowance for the fact that a joint life and last

survivor annuity is expected to be payable for longer than the greater of the

two life expectancies of the two subject lives).

The drawdown strategies allowed for are those detailed in Section 4.3 above.

Whilst all of the results of our calculations are shown in Appendix 2, one set of

calculations will be of particular interest, namely the calculations that assume

that the pensioner(s) draw down on their assets at the SIS minimum rate. The

authors note that the “SIS minimum drawdown rule” is the single most common

strategy employed by pensioners. We also regard the SIS minimum drawdowns

as being broadly appropriate for account based pensions in the absence of

investment linked life annuities and ignoring the impact of relatively slow

drawdown on age pension entitlements. We have found that the SIS minimum

drawdown percentages can be replicated using 2.5% per annum real interest

(corresponding approximately to “conservative balanced” return

expectations) and an assumption that the retiree believes that he or she will

survive to the 95th percentile of his or her 65-year old cohort. These assumptions

do not seem unreasonable, at least on the assumption that any AP

entitlements may be ignored.

Therefore we have reproduced the EMTRs for a single pensioner in the chart

below, assuming a drawdown strategy of “SIS minimum”.

0%

20%

40%

60%

80%

100%

120%

$253K $353K $453K $553K $653K $753K

Females 1% real earnings



Males 1% real earnings




19 / 42

Figure 3: EMTRs based on drawing down the SIS minimum – Single

Pensioners

Just to recap on the contents of Figure 3, the curves in the chart show the

percentage of a marginal additional $100,000 of assets at the point in time

when the pensioner(s) reaches eligibility age for the age pension, which is lost

as a consequence of AP foregone.

We note from Figure 2 that, as we should expect, the female EMTRs are

generally marginally higher than the corresponding male EMTRs, due to the

longer life expectancy of females, hence more year’s potential loss of AP.

However the EMTR curves for the two genders are quite similar for a given level

of real interest rates.

Secondly we note that the shape of the curves for different real interest rates is

a little different; for example, the 5% real interest curves fall away more steeply

for base asset level of $553,000 or more (that is, at or above the upper assets

test threshold). This occurs because the 5% real interest rate will tend to mean

that if assets are at or above the upper asset test threshold when the pensioner

attains eligibility age, then the value of assets will remain above the upper

threshold, and no further AP is foregone. However if assets are within the asset

testing range at AP eligibility age, they will remain between the thresholds for

longer so increasing the loss of AP. However at lower rates of real interest, the

asset values are depleted more quickly over time with the result that less AP is

lost at lower starting balances, but more is lost due to the incremental $100,000

relative to starting assets over the upper threshold.

But finally, the most significant observation is just how high the EMTRs are,

throughout the asset testing range (especially in the middle and upper thirds of

the asset testing range) and also, particularly for low real interest assumptions,

somewhat above the upper assets testing threshold. Surely even EMTRs in the

vicinity of 40% are going to represent an incentive to adopt means test

avoidance strategies, let alone EMTRs in the range of 80%, 90%, 100%, or even

higher. EMTRs of this order of magnitude will represent a very powerful

incentive to:

Give money away 5 years prior to attaining eligibility age;

Spend down rapidly in the first few years on pension;

Spend money on house renovations, or even purchase a more

expensive property; or finally,

Not save in the first place: spend it during one’s younger years rather

than save for retirement in the context of a pension welfare environment

that provides a very powerful disincentive to save.

All of these are obviously distortions to the economic decisions that the pre-

retiree would otherwise have made. All result in an increased burden on the

public purse, damaging the fiscal sustainability of the welfare system because


20 / 42

people who could have provided for themselves are encouraged by the

incentive structure to fall back instead on government support, at significant

cost to the taxpayer.

6 Evaluation

While the results will vary significantly depending on the underlying assumptions,

one can draw three conclusions from these calculations:

1. Pensioners are penalised, and greater fiscal savings accrue, the longer

pensioners retain their asset-testable assets.

2. The penalties can be reduced by giving money directly to heirs, by

spending the money faster, and especially by investing in the family home.

These actions are therefore incentivised.

3. There are very significant gains that can be made by adopting different

drawdown strategies. Determining an optimal strategy is however complex for

pensioners, made more difficult by ongoing changes in the means test rules.

Forecasting is also difficult for government as pensioners change their strategies

in reaction to the incentives.

6.1 Evaluation against the criteria.

6.1.1 Neutrality

The current structure of the asset test is not neutral when the rules are applied

over a lifetime. Annuities do enjoy relatively favourable treatment relative to

applying the minimum drawdown to an account-based pension, but the latter

allows for flexibility that can be used to manipulate the rules to the point of

avoiding the asset test entirely.

6.1.2 Equity

The current system creates significant inequities.

Horizontal inequity arises for people with the same level of wealth (which

is at one level fungible). Non-homeowners with $1 million in assets will

get no AP, while homeowners with a house of that value will draw the

whole AP.

Vertical inequity arises when the differences in treatment applied to

people are not proportional to the differences in their characteristics.

The dramatically higher taper applied by the asset test does not seem

proportionate, neither does the failure to differentiate between those

with valuable houses and those with small apartments.

The asset test fails to provide vertical equity for those with different life

expectancies. Most important is that they penalise younger retirees at


21 / 42

the expense of older ones. A couple of 67 with $1 million in assets and

investment income of $50,000 cannot afford the ASFA comfortable

retirement. A couple of 90 in the same position could comfortably

spend $100,000 pa, well above the comfortable level.

Women also need more than men to maintain the same spending given

their greater expected longevity. Arguably the assets tests are

discriminatory as they advantage men (who require less) than women.

Regional differences in rent and the cost of living also create vertical

inequities, but people have the ability to move.

Those who are able to obtain appropriate advice and are able to act

on the advice can avoid the tests. Their complexity however makes it

very difficult to make the right decisions. This means that the costs are

borne by the less well informed, the cautious, and possibly by those who

regard it as anti-social or degrading to be supported by welfare.7

6.1.3 Integrity

As noted in the introductory remarks in Section 6 above, it is easy for pre-retirees

to adopt a range of strategies that mean that they will obtain a much greater

share of the AP than those who are not so well advised or who do not wish to

pursue the strategies we identified. Quite apart from legitimate means of

avoiding the means tests, it is easily conceivable that some gifting strategies

are implemented where there is an undocumented expectation that the

children to whom money has been gifted will “look after” their parents in old

age.

6.1.4 Resilience and fiscal sustainability

The desired level of fiscal expenditures could be maintained by incorporating

the principal residence into the assets test and fine-tuning the quantum of the

AP and the parameters governing the means tests. In times of fiscal constraints,

all Australians should expect to bear some of the burden and pensioners as

much as anyone should expect smallish reductions in their standard of living at

times. Transitional arrangements should apply for some period of time to

mitigate the impact of the changes on those most adversely affected by the

changes.

6.1.5 Simplicity

Benefits cannot be targeted precisely at those that need them. Needs are

complex and fluctuating; evaluation methods inevitably somewhat simplistic,

7 We are not aware Australian evidence, but stigma apparently explains lower take up rates of

pension in the UK

https://www.pensionspolicyinstitute.org.uk/uploaded/documents/PPI_Nuffield_seminar_5_main_p

aper_Nov05.pdf


22 / 42

limited to a particular time and prone to error. Bradshaw and Finch (2003)

looked at three different approaches to measuring poverty; “lacking socially

perceived necessities; being subjectively poor and having a relatively low

income… we have found that there is little overlap in the group of people

defined as poor by these dimensions.”

The different levels of AP and associated supplements, and permutations of the

means tests create an entirely spurious impression of targeting needs. The trivial

nature of some of the supplements and concessions, such as the lower

deeming rate for the income test, are not only wasteful of energy but bring the

whole system into disrepute. This is particularly true when material differences

such as housing are not taken into account.

Maeda (2006) suggest that the three laws of simplification are reduce, organise

and save time. Reduction and saving time are obvious. Organisation may not

be. Schedule 7 of the SIS Regulations, which has 7 categories for minimum

drawdown amounts is more complex than Schedule 1A which has 80 for each

age from 20 to 100. This is because one cannot remember all 7 categories so

that they both have to be looked up, but changing the factor each year is

more intuitive and so easier to understand, to administer and creates a

smoother cash flow.

The suggestions made below in Section 7, would not only be simpler, but more

clearly meet the criteria that have been mentioned: neutrality, equity, integrity

and resilience.

6.2 Perverse incentives

There is therefore a strong incentive to draw down quickly or move assets into

the family home. Research suggests that retirees do both8. While only 19% of

couple pensioners are subject to the asset test9, rough calculations suggest that

over a third of those over 65 should be in this category10. An analysis of

Centrelink data suggested that those pensioners subject to the asset test draw

down their assets up to 10% faster. 11

8 Sane, R. and Piggott, J., 2008, October. Does the Owner-Occupier Exemption from the

Pensions Means Test Affect Housing Choice of the Elderly? Evidence from Australia.

Bradbury, B., 2010. Asset rich, but income poor: Australian housing wealth and retirement in

an international context. FaHCSIA Social Policy Research Paper, (41).

9 Department of social Service Statistical Overview 2013

10 ABS 6554 (2012) reports median net worth of $730,000 for those of 65 and home values of

$398,000 for the population, meaning that those on the median are well above the asset test

free limit of $273,000 of that year. Those at the top of the 80th percentile have assets of $1.5

m, but deducting homes of more than $500,000 means that they too should be captured.

11www.cepar.edu.au/media/154967/age_pensioner_profiles_a_longitudinal_study_of_incom

e__assets_and_decumulation.pdf


23 / 42

7 Remedies

7.1 Revert to former asset test taper rate

One policy option would be to revert to the former 3.9% asset test taper rate

that applied between 2007 and 2016. Such a solution would mitigate the

extremely high EMTRs that currently apply especially in the upper parts of the

asset testing range and therefore reduce the attractiveness of strategies

designed to increase age pension entitlements.

If the taper rate were reverted to 3.9%, there would need to be changes in the

upper and/or lower assets test thresholds. For example the thresholds could

revert to something like the pre-2016 asset testing thresholds (but with

indexation adjustments). However if the opportunity were taken to include the

principal residence in the means tests, then the lower threshold should be

increased markedly, by something like the value of a basic home.

7.2 Abolish the asset test and convert superannuation into an income stream

The obvious solution is to abolish the asset test, which so contorts the retirement

system and the lives of most Australian pensioners. Assets should be converted

into a lifetime income (for the couple and other dependents if relevant). This

can be done by dividing the value of assets by the Pension Valuation Factors

(PVFs) in Column 4 of Schedule 1A of the SIS Regulations for singles; higher PVFs

should be used for couples.

This would lead to higher AP costs in the short run, but there would be no

increase in AP payments as people age. We have not attempted any

modelling of this proposal as we would expect the parameters to change over

time.

The additional fiscal costs in the short term can easily be covered by including

the value of the principal residence at an imputed rent. Rent assistance would

be payable to everyone, further simplifying the system. The net impact would

be felt most by people with low financial assets and expensive houses.

Assuming an annuity rate of 7.5% at age 65, a deeming rate of 4% and an asset

free threshold of $100,000 for singles and $150,000 for couples, the following

would be the gains and losses.


24 / 42

SINGLE COUPLE

Financial assets House Current Proposed Gain


250000 0 26254 23629 -2625

250000 0 38058 37308 -750

500000 0 7047 14254 7208

500000 0 38058 27933 -10125

750000 0 0 4879 4879

750000 0 24837 18558 -6279

1000000 0 0 0 0

2000000 0 0 0 0

250000 600000 23254 1129 -22125

250000 600000 35058 14808 -20250

500000 600000 4047 0 -4047

500000 600000 25737 5433 -20304

750000 600000 0 0 0

750000 600000 6237 0 -6237

1000000 600000 0 0 0

1000000 600000 0 0 0

250000 800000 23254 0 -23254

250000 800000 35058 7308 -27750

500000 800000 4047 0 -4047

500000 800000 25737 0 -25737

750000 800000 0 0 0

750000 800000 6237 0 -6237

1000000 800000 0 0 0

1000000 800000 0 0 0

250000 1000000 23254 0 -23254

250000 1000000 35058 0 -35058

500000 1000000 4047 0 -4047

500000 1000000 25737 0 -25737

750000 1000000 0 0 0

750000 1000000 6237 0 -6237

1000000 1000000 0 0 0

1000000 1000000 0 0 0

If one decided that it was not necessary to annuitise the principal residence,

one could determine imputed rent at 4% to produce the following.

SINGLE COUPLE



250000 0 26254 23629 -2625 250000 0 38058 35433 -2625

500000 0 7047 14254 7208 500000 0 38058 26058 -12000

750000 0 0 4879 4879 750000 0 24837 16683 -8154

1000000 0 0 0 0 2000000 0 0 0 0

250000 600000 23254 11629 -11625 250000 600000 35058 23433 -11625

500000 600000 4047 2254 -1793 500000 600000 25737 14058 -11679

750000 600000 0 0 0 750000 600000 6237 4683 -1554

1000000 600000 0 0 0 1000000 600000 0 0 0

250000 800000 23254 7629 -15625 250000 800000 35058 19433 -15625

500000 800000 4047 0 -4047 500000 800000 25737 10058 -15679

750000 800000 0 0 0 750000 800000 6237 683 -5554

1000000 800000 0 0 0 1000000 800000 0 0 0

250000 1000000 23254 3629 -19625 250000 1000000 35058 15433 -19625

500000 1000000 4047 0 -4047 500000 1000000 25737 6058 -19679

750000 1000000 0 0 0 750000 1000000 6237 0 -6237

1000000 1000000 0 0 0 1000000 1000000 0 0 0

Single renters of moderate means would be the main winners. There are

however very few of them currently, but the removing the incentive to hold

onto a home might well increase numbers.

The main losers would be homeowners with minimal assets. Their loss of

spending power could be addressed by an expanded Pension Loans Scheme.


25 / 42

Under the existing scheme, part pensioners can be lent the difference between

the full AP and the part AP for which they qualify, but the scheme would need

to be expanded to allow non-pensioner homeowners to be eligible for a loan.

Centrelink would take ownership of a proportion of the value of the home that

this represents. As the loss of pension is only 2% of the value of the house (under

the second proposed scenario), they could borrow for many years before

exhausting the value of the house. A “no negative equity” guarantee would

have a trivial cost.

If they were to be expected to annuitise the home as well, then the reverse

mortgage should also be structured as an annuity, but this is likely to be a little

too difficult to explain!

7.3 Personal responsibility and political games

The problems with the existing system are clear. It cannot be justified, but the

dire state of much current political debate means that the problems remain

running sores. There is a clear need for bi-partisan agreement not to resort to

irrational soundbites. Such an agreement needs to include the major industry

players and media commentators. Those who exploit the uncertainty that will

naturally be felt by many pensioners need to be openly and quickly rebuked.

The current awareness of the damage caused by manipulated outrage may

offer an opportunity for sensible discussion.

At the very least, if change is to be made, politicians and commentators will

need to be courageous and to make a stand for what it right rather than

attempt to score points.

8 Conclusion

The means tests in their current format make it exceptionally difficult to plan for

any particular pattern of spending in retirement – as the Age Pension increases

with reductions in assets and income in a way that is difficult to understand and

model over a retired lifetime. They also provide very strong incentives for pre-

retirees to engage in a range of strategies to maximise their age pension, but

apart from the unnecessary fiscal burden that such strategies impose on

taxpayers, they also distort savings and consumption decisions and asset prices

(especially of the principal residence).

9 References

Asher, A., 2017. Response to Department of Social Services (2016) Discussion

Paper: Social security means testing of retirement income streams.

https://engage.dss.gov.au/wp-content/uploads/2017/03/Discussion-Paper-

response-20170206.pdf, retrieved 6 April 2018.


26 / 42

Australian Government Actuary, 2014. Australian Life Tables 2010-2012. Tables

and report produced by the Australian Government Actuary.

http://www.aga.gov.au/publications/life_table_2010-

12/downloads/Australian_Life_Tables_2010-12_20141212.pdf, retrieved 28 March

2015.

Bradbury, B., 2010. Asset rich, but income poor: Australian housing wealth and

retirement in an international context. FaHCSIA Social Policy Research Paper,

(41).

Bradshaw, Jonathan and Finch, Naomi, 2003. Overlaps in dimensions of

poverty. Journal of Social Policy, 32 (4). pp. 513-525.

Chomik, R., Piggott, J., Woodland, A.D., Kudrna, G. and Kumru, C.S., 2015.

Means testing social security: Modelling and policy analysis.

Department of Social Services, 2016. Discussion Paper: Social security means

testing of retirement income streams.

Farnsworth, S., 2017. ‘Older people at risk of homelessness’

http://mobile.abc.net.au/news/2017-11-28/older-people-at-risk-of-

homelessness-jumps-50pc-in-nsw/9198420?pfmredir=sm, retrieved 6 April 2018.

Hayward, D., 1986. The great Australian dream reconsidered: A review of

Kemeny. Housing Studies, 1(4), pp.210-219.

Hulse, K., Reynolds, M. and Yates, J., 2014. Changes in the supply of affordable

housing in the private rental sector for lower-income households, 2006–2011,

Final Report no.235, Australian Housing and Urban Research Institute,

Melbourne.

Johnson, D., Brimble, M. and Worthington, A., 2016. Averting Poverty and

Government Budgetary Pressure Through Releasing Home Equity: A Safe and

Informed Solution for Baby Boomer Homeowners. Financial Planning Research

Journal, 2(1), pp.55-79.

Maeda, J., 2006. The laws of simplicity. MIT press.

NHSC (National Housing Supply Council), 2010. Second state of supply report,

Australian Government Canberra.

Sane, R. and Piggott, J., 2008. Does the Owner-Occupier Exemption from the

Pensions Means Test Affect Housing Choice of the Elderly? Evidence from

Australia CEPAR working paper.

http://wwwdocs.fce.unsw.edu.au/fce/Research/Piggott/SanePiggott08_reside

ntialchoice.pdf. Retrieved 30 April 2018


27 / 42

Appendix 1: Detailed Results (for Figure 2)

Drawing legal minimum Net gain - allowing for

survival & interest

BALANCE LOSS OF AP DRAWDOWN Pensioner Heirs

62 487005

63 501615 0 2327

64 516664 0 2519

65 532164 0 2731

66 548129 0 2974

67 537166 22399 27406 4197 3248

68 526423 21561 26858 4278 3381

69 515894 20740 26321 4340 3540

70 505576 19935 25795 4383 3706

71 495465 19146 25279 4407 3899

72 485555 18373 24773 4414 4097

73 475844 17616 24278 4404 4313

74 466327 16874 23792 4376 4534

75 452338 15782 27980 7369 4766

76 438768 14724 27140 7151 4940

77 425605 13697 26326 6919 5117

78 412836 12701 25536 6672 5298

79 400451 11735 24770 6410 5503

80 384433 10486 28032 8133 5728

81 369056 9286 26910 7668 5909

82 354294 8135 25834 7193 6098

83 340122 7030 24801 6706 6279

84 326517 5968 23809 6208 6439

85 306926 4440 29387 7942 6558

86 288510 3004 27623 7104 6486

87 271200 1906 25966 6227 6343

88 254928 1642 24408 5222 6120

89 239632 1393 22944 4321 5819

90 220462 1082 26360 4365 5436

91 202825 795 24251 3428 4875

92 186599 531 22311 2644 4282

93 171671 289 20526 1999 3672

94 157937 65 18884 1478 3063

95 140564 0 22111 1350 2478

96 125102 0 19679 911 1877

97 111341 0 17514 600 1376

98 99093 0 15588 386 975

99 88193 0 13873 243 670

100 78492 0 12347 149 445

101 69858 0 10989 90 287

102 62173 0 9780 53 182

103 55334 0 8704 30 112

104 49248 0 7747 17 67

105 43830 0 6895 9 39

106 39009 0 6136 5 23

107 34718 0 5461 3 13

108 30899 0 4861 1 7

109 27500 0 4326 0 9

153,808 158,559


28 / 42

Give away and draw legal minimum Net gain - allowing for

survival & interest


62 225454

63 232217 0 1077

64 239184 0 1166

65 246359 0 1264

66 253750 0 1377

67 248675 1540 12688 9344 1504

68 243702 1459 12434 8864 1565

69 238828 1380 12185 8402 1639

70 234051 1302 11941 7958 1716

71 229370 1226 11703 7529 1805

72 224783 1152 11469 7116 1897

73 220287 1079 11239 6716 1997

74 215881 1007 11014 6330 2099

75 209405 902 12953 7281 2206

76 203123 800 12564 6776 2287

77 197029 701 12187 6293 2369

78 191118 605 11822 5831 2452

79 185385 512 11467 5387 2547

80 177969 391 12977 5834 2652

81 170850 275 12458 5301 2736

82 164016 164 11960 4794 2823

83 157456 58 11481 4311 2907

84 151158 0 11022 3836 2981

85 142088 0 13604 4331 3036

86 133563 0 12788 3690 3003

87 125549 0 12021 3111 2936

88 118016 0 11299 2592 2833

89 110935 0 10621 2130 2694

90 102060 0 12203 2107 2517

91 93896 0 11227 1641 2257

92 86384 0 10329 1254 1982

93 79473 0 9502 938 1700

94 73115 0 8742 687 1418

95 65073 0 10236 625 1147

96 57915 0 9110 422 869

97 51544 0 8108 278 637

98 45874 0 7216 179 452

99 40828 0 6422 112 310

100 36337 0 5716 69 206

101 32340 0 5087 42 133

102 28782 0 4528 24 84

103 25616 0 4030 14 52

104 22799 0 3586 8 31

105 20291 0 3192 4 18

106 18059 0 2841 2 10

107 16072 0 2528 1 6

108 14304 0 2250 1 3

109 12731 0 2003 0 4

142164 73403


29 / 42

Maintain comfortable as long as possible Net gain - allowing for

survival & interest


62 487005

63 501615 0 2327

64 516664 0 2519

65 532164 0 2731

66 548129 0 2974

67 521115 22962 43457 17179 3248

68 495399 20855 41350 16553 3280

69 470917 18849 39344 15937 3331

70 447610 16939 37434 15330 3383

71 425422 15121 35616 14730 3452

72 404299 13390 33886 14136 3518

73 384189 11743 32238 13548 3591

74 365045 10174 30670 12964 3661

75 346820 8681 29176 12383 3731

76 329470 7259 27755 11805 3787

77 312953 5906 26402 11229 3842

78 297228 4618 25113 10654 3895

79 282258 3391 23887 10079 3962

80 268007 2224 22719 9500 4037

81 253698 1854 22350 8918 4120

82 243550 1622 17759 6558 4192

83 233808 1457 17048 5884 4316

84 224455 1298 16367 5244 4426

85 210988 1146 20201 6066 4508

86 198329 928 18989 5212 4459

87 186429 722 17850 4433 4360

88 175243 528 16779 3727 4207

89 164729 347 15772 3093 4000

90 151550 176 18120 3098 3737

91 139426 0 16671 2437 3351

92 128272 0 15337 1862 2944

93 118010 0 14110 1394 2524

94 108570 0 12981 1020 2105

95 96627 0 15200 928 1703

96 85998 0 13528 626 1290

97 76538 0 12040 413 946

98 68119 0 10715 265 670

99 60626 0 9537 167 461

100 53957 0 8488 102 306

101 48022 0 7554 62 198

102 42739 0 6723 36 125

103 38038 0 5984 21 77

104 33854 0 5325 12 46

105 30130 0 4740 6 27

106 26816 0 4218 3 16

107 23866 0 3754 2 9

108 21241 0 3341 1 5

109 18904 0 2974 0 6

247,615 120,404


30 / 42

Level annuity plus Allocated Pensions Net gain - allowing for

survival & interest


62 487005 63 501615

0 0 373

64 518735

0 0 402

65 536617

0 0 433

66 555320

0 0 469

67 525994 21994 48922 22571 386

68 499507 18663 45592 21749 309

69 475578 15548 42476 20939 240

70 454119 12636 39565 20142 178

71 435028 9919 36848 19353 125

72 418233 7387 34316 18574 81

73 403646 5031 31960 17800 49

74 391201 2843 29772 17033 30

75 380826 814 27743 16270 25

76 371254 145 27074 15510 26

77 361849 144 27073 14753 27

78 352645 144 27073 13998 27

79 343680 143 27072 13242 28

80 335026 143 27071 12483 28

81 326757 142 27071 11717 29

82 318954 142 27070 10944 29

83 311702 141 27070 10162 29

84 305070 141 27069 9371 28

85 299112 140 27069 8573 27

86 293854 139 27068 7771 26

87 289289 139 27067 6970 24

88 285361 138 27067 6177 22

89 281956 137 27066 5400 19

90 278912 137 27065 4650 16

91 275992 136 27065 3936 13

92 272902 135 27064 3269 10

93 269304 135 27063 2660 8

94 264817 134 27062 2116 5

95 259033 133 27062 1644 4

96 251583 132 27061 1247 2

97 242181 132 27060 923 1

98 230679 131 27059 667 1

99 217052 130 27059 471 0

100 201408 129 27058 325 0

101 183922 128 27057 220 0

102 164819 127 27056 145 0

103 144331 126 27055 94 0

104 122641 126 27054 59 0

105 99894 125 27053 37 0

106 76200 124 27052 22 0

107 51629 123 27051 13 0

108 26222 122 27050 8 0

109 0 121 27049 0 0

344006 3529


31 / 42

Appendix 2 EMTRs by asset tranche

1 Single females using SIS minimum drawdown rules

TABLE OF RESULTS - LOWER THIRD OF ASSET TESTING RANGE

Extra Real Earnings Rate

Drawdown 0% 1% 2% 3% 4% 5% 6% 7%

0% 28% 32% 37% 45% 57% 75% 95% 100% 1% 24% 27% 30% 35% 43% 53% 69% 87%

2% 21% 23% 26% 29% 34% 40% 50% 64%

3% 19% 20% 22% 25% 28% 32% 38% 47%

4% 17% 18% 20% 21% 24% 27% 30% 36%

5% 16% 17% 18% 19% 21% 23% 25% 29%

TABLE OF RESULTS - MIDDLE THIRD OF ASSET TESTING RANGE

Extra Real Earnings Rate Drawdown 0% 1% 2% 3% 4% 5% 6% 7%

0% 58% 67% 77% 88% 99% 105% 105% 99% 1% 50% 55% 63% 72% 82% 90% 96% 96%

2% 43% 47% 53% 59% 67% 76% 83% 88%

3% 38% 41% 45% 50% 56% 63% 71% 77%

4% 34% 37% 40% 43% 48% 53% 60% 66%

5% 31% 33% 36% 38% 42% 46% 51% 56%

TABLE OF RESULTS - UPPER THIRD OF ASSET TESTING RANGE


0% 76% 84% 92% 100% 105% 105% 73% 34% 1% 65% 71% 78% 85% 92% 96% 95% 67%

2% 56% 61% 67% 73% 79% 84% 88% 87%

3% 50% 54% 58% 63% 68% 74% 78% 81%

4% 45% 48% 51% 55% 60% 64% 69% 72%

5% 40% 43% 46% 49% 52% 56% 60% 64%


32 / 42

TABLE OF RESULTS - FIRST $100K ABOVE ASSET TESTING RANGE


0% 70% 74% 76% 73% 55% 19% 1% 0% 1% 60% 64% 67% 68% 64% 48% 16% 1%

2% 52% 55% 59% 61% 61% 57% 42% 13%

3% 46% 49% 51% 54% 56% 56% 51% 37%

4% 40% 43% 45% 48% 50% 51% 50% 46%

5% 36% 38% 41% 43% 45% 46% 47% 46%

TABLE OF RESULTS - SECOND $100K ABOVE ASSET TESTING RANGE


0% 57% 56% 50% 38% 19% 4% 0% 0% 1% 50% 51% 49% 44% 32% 16% 3% 0%

2% 44% 45% 45% 43% 38% 27% 13% 3%

3% 39% 40% 41% 41% 38% 33% 23% 11%

4% 35% 36% 37% 37% 37% 34% 29% 20%

5% 32% 33% 33% 34% 34% 33% 30% 25%

TABLE OF RESULTS - THIRD $100K ABOVE ASSET TESTING RANGE


0% 46% 42% 35% 22% 8% 0% 0% 0%

1% 42% 40% 36% 29% 18% 7% 0% 0%

2% 38% 37% 35% 31% 25% 15% 5% 0%

3% 33% 34% 33% 31% 27% 21% 12% 4%

4% 30% 30% 31% 29% 27% 23% 18% 10%

5% 27% 28% 28% 28% 26% 24% 20% 15%


33 / 42

2 Single Males using SIS minimum drawdown rules



0% 28% 32% 37% 45% 56% 74% 91% 95% 1% 24% 27% 30% 35% 42% 53% 68% 83%

2% 21% 23% 26% 29% 34% 40% 49% 63%

3% 19% 20% 22% 25% 28% 32% 38% 46%

4% 17% 18% 20% 21% 24% 27% 30% 36%

5% 16% 17% 18% 19% 21% 23% 25% 29%



0% 58% 67% 76% 87% 97% 100% 100% 93%

1% 50% 55% 63% 72% 81% 89% 92% 91%

2% 43% 47% 53% 59% 67% 75% 83% 84%

3% 38% 41% 45% 50% 56% 63% 70% 76%

4% 34% 37% 40% 43% 48% 53% 60% 66%

5% 31% 33% 36% 38% 42% 46% 51% 56%



0% 76% 84% 91% 99% 100% 99% 68% 34% 1% 65% 71% 78% 85% 91% 92% 91% 63%

2% 56% 61% 67% 73% 78% 84% 85% 84%

3% 50% 54% 58% 63% 68% 73% 77% 78%

4% 45% 48% 51% 55% 60% 64% 68% 72%

5% 40% 43% 46% 49% 52% 56% 60% 64%


34 / 42



0% 70% 73% 75% 69% 49% 14% 0% 0% 1% 60% 64% 66% 67% 61% 43% 12% 0%

2% 52% 55% 59% 61% 61% 55% 38% 10%

3% 46% 49% 51% 54% 55% 55% 49% 34%

4% 40% 43% 45% 48% 50% 51% 50% 44%

5% 36% 38% 41% 43% 45% 46% 47% 45%



0% 56% 55% 48% 32% 14% 0% 0% 0% 1% 50% 50% 48% 42% 28% 12% 0% 0%

2% 44% 45% 45% 43% 36% 24% 10% 0%

3% 39% 40% 41% 40% 38% 32% 20% 8%

4% 35% 36% 37% 37% 36% 34% 28% 17%

5% 32% 33% 33% 34% 34% 33% 30% 24%



0% 45% 41% 30% 16% 3% 0% 0% 0%

1% 42% 39% 35% 26% 14% 2% 0% 0%

2% 38% 37% 33% 30% 22% 11% 2% 0%

3% 33% 34% 33% 30% 26% 19% 10% 1%

4% 30% 30% 31% 29% 27% 23% 16% 8%

5% 27% 28% 28% 28% 26% 24% 20% 14%


35 / 42

3 Couples using SIS minimum drawdown rules



0% 28% 32% 40% 50% 66% 88% 104% 102%

1% 24% 27% 31% 38% 47% 61% 80% 94%

2% 21% 23% 26% 30% 36% 44% 57% 73%

3% 19% 20% 22% 25% 29% 34% 42% 53%

4% 17% 18% 20% 22% 24% 28% 33% 40%

5% 16% 16% 18% 19% 21% 24% 27% 31%



0% 59% 69% 80% 94% 107% 108% 103% 93% 1% 50% 56% 65% 74% 86% 97% 98% 94%

2% 43% 48% 54% 61% 70% 80% 88% 90%

3% 38% 42% 46% 51% 58% 65% 74% 81%

4% 34% 37% 40% 44% 49% 55% 61% 69%

5% 31% 33% 36% 39% 42% 47% 52% 58%


Extra Real Earnings Rate

Drawdown 0% 1% 2% 3% 4% 5% 6% 7%

0% 77% 86% 97% 108% 109% 104% 69% 34% 1% 66% 73% 80% 89% 98% 99% 95% 63%

2% 57% 62% 68% 75% 82% 89% 90% 87%

3% 50% 54% 59% 64% 70% 76% 82% 82%

4% 45% 48% 52% 56% 60% 65% 71% 75%

5% 41% 43% 46% 49% 53% 57% 61% 66%


36 / 42



0% 72% 78% 83% 78% 56% 14% 0% 0% 1% 61% 66% 70% 74% 68% 49% 12% 0%

2% 52% 56% 60% 64% 66% 60% 43% 10%

3% 46% 49% 52% 55% 58% 59% 54% 37%

4% 41% 44% 46% 48% 51% 53% 54% 48%

5% 36% 38% 41% 43% 45% 47% 48% 48%



0% 59% 61% 57% 41% 16% 0% 0% 0%

1% 51% 53% 54% 49% 34% 13% 0% 0%

2% 44% 46% 47% 47% 42% 29% 11% 0%

3% 39% 41% 42% 42% 41% 36% 24% 9%

4% 35% 36% 37% 38% 38% 36% 31% 21%

5% 32% 33% 33% 34% 35% 34% 32% 27%



0% 50% 49% 39% 21% 3% 0% 0% 0% 1% 43% 43% 42% 32% 17% 2% 0% 0%

2% 38% 38% 38% 35% 27% 14% 2% 0%

3% 34% 34% 34% 33% 30% 22% 12% 2%

4% 30% 31% 31% 30% 29% 26% 19% 10%

5% 27% 28% 28% 28% 27% 25% 22% 16%


37 / 42

4 Single females using fixed percentage drawdown rules


Drawdown Real Earnings Rate Rate 0% 1% 2% 3% 4% 5% 6% 7%

5.0% 28% 33% 40% 48% 63% 87% 102% 104% 7.5% 20% 22% 24% 27% 31% 37% 45% 61%

10.0% 16% 17% 18% 19% 21% 23% 26% 30%

12.5% 13% 13% 14% 15% 16% 17% 18% 20%

15.0% 11% 12% 13% 13% 13% 14% 15% 15%



5.0% 60% 69% 80% 97% 110% 110% 108% 84% 7.5% 41% 45% 49% 56% 63% 73% 85% 87%

10.0% 31% 33% 36% 39% 42% 46% 52% 58%

12.5% 25% 27% 28% 30% 32% 34% 37% 40%

15.0% 21% 22% 23% 24% 26% 27% 28% 30%


Drawdown Real Earnings Rate

Rate 0% 1% 2% 3% 4% 5% 6% 7%

5.0% 79% 89% 101% 111% 110% 109% 56% 34% 7.5% 53% 58% 64% 70% 77% 86% 87% 87%

10.0% 40% 43% 46% 49% 53% 57% 62% 68%

12.5% 33% 34% 36% 38% 40% 43% 45% 48%

15.0% 28% 29% 30% 31% 32% 34% 36% 37%


38 / 42



5.0% 74% 81% 87% 79% 56% 0% 0% 0% 7.5% 49% 53% 58% 61% 65% 62% 51% 20%

10.0% 36% 38% 41% 43% 46% 48% 50% 50%

12.5% 29% 29% 31% 33% 35% 36% 38% 39%

15.0% 24% 24% 25% 26% 27% 28% 29% 31%



5.0% 63% 65% 58% 39% 5% 0% 0% 0% 7.5% 43% 45% 46% 47% 45% 34% 15% 0%

10.0% 32% 33% 34% 35% 36% 36% 34% 28%

12.5% 25% 26% 26% 27% 27% 28% 28% 28%

15.0% 20% 21% 21% 22% 23% 23% 23% 23%



5.0% 53% 52% 38% 16% 0% 0% 0% 0% 7.5% 37% 38% 38% 37% 30% 17% 1% 0%

10.0% 27% 28% 29% 29% 29% 27% 24% 16%

12.5% 22% 22% 23% 23% 23% 22% 22% 21%

15.0% 17% 18% 19% 19% 19% 19% 19% 18%


39 / 42

5 Single Males using fixed percentage drawdown rules



5.0% 28% 33% 39% 46% 61% 81% 95% 97% 7.5% 20% 22% 24% 27% 31% 36% 44% 59%

10.0% 16% 17% 18% 19% 21% 23% 26% 30%

12.5% 13% 13% 14% 15% 16% 17% 18% 20%

15.0% 11% 12% 12% 13% 13% 14% 15% 15%



5.0% 60% 68% 79% 95% 103% 103% 102% 84% 7.5% 41% 45% 49% 56% 63% 72% 82% 83%

10.0% 31% 33% 36% 39% 42% 46% 51% 57%

12.5% 25% 27% 28% 30% 32% 34% 37% 40%

15.0% 21% 22% 23% 24% 26% 27% 28% 30%



Rate 0% 1% 2% 3% 4% 5% 6% 7%

5.0% 78% 87% 99% 104% 103% 102% 56% 34% 7.5% 53% 58% 63% 69% 76% 83% 83% 83%

10.0% 40% 43% 46% 49% 53% 57% 62% 67%

12.5% 33% 34% 36% 38% 40% 43% 45% 48%

15.0% 28% 29% 30% 31% 32% 34% 36% 37%


40 / 42



5.0% 73% 80% 80% 71% 49% 0% 0% 0% 7.5% 49% 53% 57% 60% 63% 58% 47% 17%

10.0% 36% 38% 41% 43% 46% 48% 49% 48%

12.5% 29% 29% 31% 33% 35% 36% 38% 39%

15.0% 24% 24% 25% 26% 27% 28% 29% 31%



5.0% 61% 62% 51% 32% 2% 0% 0% 0% 7.5% 43% 45% 45% 46% 41% 29% 11% 0%

10.0% 32% 33% 34% 35% 36% 35% 33% 25%

12.5% 25% 26% 26% 27% 27% 28% 28% 28%

15.0% 20% 21% 21% 22% 23% 23% 23% 23%



Rate 0% 1% 2% 3% 4% 5% 6% 7%

5.0% 52% 45% 31% 9% 0% 0% 0% 0% 7.5% 37% 38% 37% 35% 26% 13% 0% 0%

10.0% 27% 28% 29% 29% 28% 26% 21% 13%

12.5% 22% 22% 23% 23% 23% 22% 22% 20%

15.0% 17% 18% 19% 19% 19% 19% 19% 18%


41 / 42

6 Couples using fixed percentage drawdown rules



5.0% 28% 35% 42% 58% 79% 99% 103% 99%

7.5% 20% 21% 24% 28% 33% 41% 55% 70%

10.0% 16% 16% 18% 19% 21% 24% 27% 32%

12.5% 13% 14% 14% 15% 16% 17% 19% 21%

15.0% 11% 12% 12% 13% 13% 14% 15% 16%



5.0% 62% 72% 90% 109% 115% 104% 102% 84%

7.5% 41% 45% 50% 57% 67% 80% 89% 87%

10.0% 31% 33% 36% 39% 43% 48% 53% 62%

12.5% 26% 27% 28% 30% 32% 34% 37% 40%

15.0% 22% 23% 24% 25% 26% 27% 29% 31%



5.0% 82% 97% 112% 115% 105% 103% 57% 34% 7.5% 53% 59% 65% 73% 84% 90% 88% 83%

10.0% 41% 43% 46% 50% 54% 59% 65% 71%

12.5% 33% 34% 36% 38% 40% 43% 46% 49%

15.0% 28% 29% 30% 31% 32% 34% 36% 38%


42 / 42



5.0% 80% 93% 92% 77% 50% 0% 0% 0% 7.5% 50% 54% 59% 67% 70% 64% 47% 18%

10.0% 36% 39% 41% 44% 47% 50% 54% 51%

12.5% 29% 30% 31% 33% 35% 37% 38% 40%

15.0% 24% 24% 25% 26% 27% 28% 30% 31%



5.0% 73% 73% 62% 33% 2% 0% 0% 0% 7.5% 44% 46% 50% 53% 47% 31% 11% 0%

10.0% 32% 33% 34% 36% 37% 39% 36% 29%

12.5% 25% 26% 27% 28% 28% 29% 29% 29%

15.0% 20% 21% 22% 22% 23% 23% 23% 23%



5.0% 65% 56% 33% 9% 0% 0% 0% 0% 7.5% 38% 40% 44% 41% 31% 14% 0% 0%

10.0% 27% 28% 29% 30% 31% 30% 25% 14%

12.5% 22% 22% 23% 23% 23% 23% 23% 23%

15.0% 17% 18% 19% 19% 19% 19% 19% 19%

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