‘If we divorce, can we still get the pension with $900K in cash and a $800K inheritance?’

Sep 18, 2020
Getting divorced can ignite a whole range of financial problems. Source: Getty.

Q: My husband, 72,  and I, 68, have been self-employed throughout our married life. We sold our home in the middle of the first New South Wales Covid-19 lockdown so received $100,000 less for the property than we otherwise, but paid off our mortgage of nearly $500,000 and now have $900,000 in the bank from the proceeds of the sale (and at the current deeming rate this is losing us, I think, $65 each per fortnight from our full Age Pension entitlement).

I have just two weeks (September 18) to contribute up to $300,000 to my superannuation under the downsizing rule – I currently have just $23,000 in my super. My husband doesn’t have any super at all. We own a $28,000 car, between $20,000 and $30,000 in furniture and I have a $30,000 inheritance in term deposits. We are also looking for a new home.

I have several questions!

Q1. Will the sum I contribute to super reduce our deemed assets or will the contribution amount still be viewed as an asset. As such, is it worth putting $100,000 into super and leave up to $800,000 free to buy another home?

A: I am assuming that you are now both retired. As you have reached Age Pension age, any superannuation balances count as an asset under the assets test and will be deemed to earn income under the income test.  Putting $100,000 from your bank account into super will not change (for better or worse) your Age Pension outcomes.

With $900,000 in the bank you would normally be eligible for just a very small (if you are non-homeowners) or no (if you are homeowners) Age Pension. In your case, because you have sold your home and intend to use most of the proceeds to purchase another home, the portion of the sale proceeds intended to be used for the new purchase are exempt from the assets test for up to 12 months.

Q2. I expect to receive approximately $800,000 in inheritance from my mother, who is now 97, and this is likely to occur in the next year or so. How can we ensure this sum doesn’t impact our full pension? I understood that an inheritance itself doesn’t impact the pension, but the interest earned or the value of assets purchased with it do – is that correct? Should I place this sum in some sort of ‘life equity fund’?

A: An $800,000 inheritance is very likely to impact your Age Pension. Any inherited asset will count as an asset under the assets test, and if it is in a financial investment it will be deemed to earn income under the income test.

Assuming you are homeowners when you receive the inheritance, the inheritance combined with your other assets will push you over the asset test cut-off, which is currently $876,500.

There are certain assets that are either fully or partially exempt from the assets test, though, that could help you retain a part-Age Pension after receiving your inheritance.  You could purchase a more expensive home, or an investment in a funeral bond (limits apply) or a pre-paid funeral, both of which are exempt assets. Likewise, a gift of up to $10,000 per financial year (with no more than $30,000 gifted in total over five years) is also exempt.

An investment in a lifetime income stream – a type of investment that pays regular income payments, that can be purchased using super or non-super money – would have just 60 per cent of the investment amount counted as an asset. You can read more here about how Centrelink treats lifetime income streams – the means testing treatment changed last year – but getting advice from a financial adviser who specialises in this complex area is advisable.

Q3. This is the most difficult question. If my husband and I separate, we would intend to split the above assets evenly, including my inheritance. That would leave my husband with $800,000 to buy his own home but how do we best go about this without losing his pension as a single person?

A: If you and your husband were to separate and he were to use $800,000 to purchase his own home, you would be assessed individually (as singles) so both homes (yours and his) would be exempt from means testing. As single homeowners, you can each currently have assets of up to $268,000 and get the full single Age Pension and up to $583,000 to get a part-pension.

If you’ve got questions about retirement income or about downsizing in retirement, don’t miss our FREE, online masterclass at 1.00pm AEST on September 22 with veteran finance guru Noel Whittaker, downsizing expert and author Rachel Lane and Kate Melrose, an expert on land-lease communities at Ingenia Lifestyle. Click here to register to attend.

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.

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