With so many rules, loopholes and thresholds, it can be hard to get the full picture of how the Age Pension works, what you’re eligible for and how to get it.
One of the reasons the pension can be confusing is that there are quite a few common misunderstandings about it. And falling for some of them can seriously impact the payment you receive, so it’s important to be aware of what’s fact and what’s fiction when it comes to the Age Pension.
Age Pension eligibility is based on strict income and assets tests so many people believe that indiscriminately shedding assets – either by gifting to their children, spending on home renovations, moving to a more expensive property or buying large assets such as a car or caravan – will increase their pension.
But this solution has its flaws if the would-be pensioner isn’t acutely aware of Centrelink’s gifting and asset deprivation rules, as well as of what’s included in the asset test. It’s also important to know that Centrelink’s rules don’t just apply to your actions immediately before or after applying for a pension, but to the five years prior to your pension application.
Gifting is when you sell or transfer and income or asset for less than its market price or receive nothing in return. This can include selling your home to your children for less than it’s worth, giving a car as a present, paying off your children’s business loan, donating money, transferring money into a family trust or private company that you don’t control, forgiving a loan owed to you or simply making a large cash gift.
Centrelink allows a threshold of $10,000 worth of gifting per year, up to a maximum of $30,000 over a rolling five-year period; these limits apply to a couple combined or a single pensioner.
Anything you gift or sell for less than it’s worth above the maximum will be considered by Centrelink to remain your asset for the next five years, even if you no longer technically have that asset. That means it may be subject to deeming and the resulting deemed return counted as income, which could in turn reduce your pension entitlement. If you gift or sell a physical asset such as a boat or caravan, its market value could be assessed under the asset test and, again, reduce your pension.
Likewise, if you splurge on a boat or caravan in order to reduce your cash holdings and thus increase your pension entitlement, the value of that asset will still be assessed under the asset test and depending on your other financial circumstances, has the potential to impact your pension payment.
If you intentionally destroy or diminish the value of an asset, income or a source of income, that’s considered by Centrelink to be deprivation and is interpreted as an attempt to circumvent its assets and income tests (gifting over the maximum amounts, for example, is considered deprivation).
It’s particularly important to be aware of Centrelink’s rules on deprivation if you intend to enter into a granny flat arrangement, in which you ‘pay’ a family member for what’s officially known as a ‘life interest’ – in other words, the right to live with them for the rest of your life.
The Centrelink rules around granny flats are complex so it’s best to consult an independent financial adviser to understand the impact on your pension entitlement but in short, Centrelink applies a ‘reasonableness’ test to your family’s arrangement and if it decides you’ve ‘paid’ more than a reasonable sum for your life interest, you could be considered to have deprived yourself of an asset and thus see that asset assessed in the asset test.
Although it’s a topic that is constantly up for debate, your principle residence and up to two hectares of surrounding land on the same title is not included in the asset test, meaning it has no effect on your pension rate regardless of whether it’s a mansion or a shack.
But not all property is exempt from the asset test. Any real estate you own alone or jointly will be assessed under the asset test. As we mentioned above, granny flats arrangements may be included in the assets test, as might a retirement village residence. In the latter two cases, we can’t state frequently enough how important it is to seek expert advice on how such a property choice may affect your pension!
Your Age Pension is heavily based on your income, so while you can continue to work while receiving the pension, the amount you earn will have an impact on your overall rate of payment.
A fortnightly income of up to $174 for singles and $308 for couples will have no impact on the pension, but amounts earned above those limits will reduce your pension by 50c for every dollar over the limit.
However, to incentivise older Australians to remain in the workforce, Centrelink provides a Work Bonus that allows you to keep more of your pension while you continue to work.
The Work Bonus exempts the first $300 of your fortnightly income from the income test. This sum is on top of the $174 allowance singles are permitted to ear, which means you can potentially earn up to $474 a fortnight while still receiving a full Age Pension. If you’re part of a couple, you can both claim the Work Bonus at the same time and have it applied to your individual incomes.
You can even ‘bank’ your Work Bonus when you’re not working because, say, your employment is seasonal, up to a limit of $7,800 a year and have it applied to your income when you’re earning again.
There are limits, though, to what types of work are eligible for the Work Bonus and maximum income limits above which your pension entitlement ceases entirely.
It may not seem like a large sum each time an adjustment is made to the Age Pension, but the payment is indexed twice a year (on March 20 and September 20) to reflect changes in the cost of living and wage increases. The increased amount is based on what is higher between the Consumer Price Index, the Pensioner and Beneficiary Living Cost Index or the wages benchmark.
The wages benchmark sets the combined couple pension rate at just over 41 per cent of the male’s total average weekly earnings and the single rate of two-thirds of the couple rate. The government sets out in detail how it calculates increases to the Age Pension.
Of course, the pension also changes in line with big life changes you may personally encounter, such as losing a partner, selling your home or leaving the country.
IMPORTANT LEGAL INFO This article is of a general nature and FYI only, because it doesn’t take into account your financial or legal situation, objectives or needs. That means it’s not financial product or legal advice and shouldn’t be relied upon as if it is. Before making a financial or legal decision, you should work out if the info is appropriate for your situation and get independent, licensed financial services or legal advice.