While some part pensioners received small increases from January 1 most letters told of substantial cuts to retirees’ pensions. Those cuts have now come into effect.

Under the new assets test if pensioners have more assets than the limit for full pensions they lose $3 per fortnight of pension per $1,000 of extra assets. This means pensioners must earn 7.8 per cent income on their investments to replace the pensions they lose. 

The alternative is to spend their capital. Few people are keen on that idea which runs contrary to the principles of good money management.

In the current extreme low interest rate environment earning 7.8 per cent income is near impossible.

Retirees who have seen their pensions cut and who choose to keep their money in the safety of bank deposits will find they have less total income the more savings they have.

For example a pensioner couple with $335,000 of investments and $40,000 of other assets will have an annual income of $42,757 to live on. Yet a couple with $775,800 of investments will have only $19,395 annual income. The couple with more than double the savings has less than half the income.

From this it is clear that retirees whose pensions are being reduced by the assets test need to review their strategies for generating income.

They could go back to work. Or they could take time to learn about investments that pay higher incomes, perhaps with the help of a financial adviser.

There are stable, income-focused managed funds that pay up to five per cent per annum.

Blue chip shares like Commonwealth Bank and Telstra pay dividends of more than 5.2 per cent per annum, plus a refundable tax credit of another 2.2 per cent, for a total income of around 7.5 per cent. Some commercial property funds pay 6 to 8 per cent income.

A popular solution to the assets test problem is to set up a prudent balanced portfolio of managed funds and arrange for them to pay the retiree a fixed monthly payment equal to 5 to 8 per cent per annum.