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 foll owing detail s:
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 Loui se s Age Pensi on entitl ement when she becomes eligi bl e to
recei ve it. Is she assets tested or i ncome 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.

Financial Planning in Australia 5e Problems Ch18 Page 2


2
From Problem 1 above, estimate Louises 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 i nterest 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 financi al i nvestments. Determine her Age Pension entitlement and
gross i ncome 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

Financial Planning in Australia 5e Problems Ch18 Page 3



4
A retired coupl e, Thel ma and Ross, are both eli gi bl e to recei ve the Age Pensi on.
They have the foll owing assets whi ch are li sted at market val ue:

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 detail s rel ate to the annui ty:

Purchase price $60,000
Resi dual capi tal val ue nil
Term six years
Payments semi-annual
Each semi-annual payment is $6,000

The annuity is not an ATE income stream.
Cal cul ate Thel ma and Ross s combi ned assessabl e i ncome 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 J ane 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

Financial Planning in Australia 5e Problems Ch18 Page 4

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

Example: J ane and Stan gifts of $10,000 each financial year.

201213: $10,000 within limit

201314: $10,000 within limit

201415: $10,000 within limit

201516: $10,000 deprived asset

201617: $10,000 deprived asset

201718: $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

Financial Planning in Australia 5e Problems Ch18 Page 5

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 i nvestment i n shares, motor vehi cl e, house contents and other
assets. Her fi nanci al 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 Geraldines 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
Geraldines Age Pension will be $585.62 pf and the Assets Test applies.