Top up the savings: Earning extra income in retirement

Many retirees are finding themselves in an income squeeze at the moment with interest rates at historic lows, superannuation accounts coping a battering from market volatility and the Age Pension simply isn’t enough to cover the increasing cost of living. We hear a lot of ideas thrown around about how to supplement your pension so, let’s examine what can you can do to provide an income boost and some of the pros and cons associated with them.

The recent change to deeming rates with the lower rate dropping from 1 per cent to 0.25 per cent and the upper rate dropping from 3 per cent to 2.25 per cent means that the amount you are deemed to earn on your investments has reduced. Under the old rates, someone owns their home and has $300,000 of investments would be deemed to earn $7,964 a year or $306 per fortnight while under the new rates the deemed income is $5,714 a year or $220 per fortnight. Under the income test that means the pension entitlement would increase from $878 per fortnight to $921 per fortnight. But the reality is that the pension is calculated under an Income and an Asset Test and the asset test amount is $834 per fortnight and because it is the lowest entitlement amount that is what will be paid.

But every cloud has a silver lining and in this case, the silver lining is that you could earn another $175 per fortnight of income and still get $834 per fortnight of pension. Better yet, regardless of what you are actually earning on your investments, the deeming rates are used to determine the amount of income – so getting your investments working harder for you won’t contribute to the amount of income you are deemed to earn and therefore your pension entitlement but it will certainly contribute to the amount you have in your hand to spend.

Rent out your home or spare room

An idea that gets tossed around from time to time is to rent out a room or a granny flat (if you have one) to supplement your income. In fact, AirBnB claims that people over 60 are the fastest-growing host demographic in Australia, hosting 802,000 guests and earning $158 million in 2017, with a typical host earning $5,500 a year.

Of course, these arrangements are not free – it is free to advertise your property but AirBnB will take between 3% and 5% of the booking fee, you may need to renovate, purchase new linen, furniture, toiletries and food and you will need to invest the time to set up your account, be there to meet guests and clean up after they leave (or pay someone else to do it for you). AirBnB provides host insurance but you may also need to update your home and contents insurance to make sure you are completely covered.

And then there are the other financial implications – now that you have turned your property into an income-producing asset (investment) Centrelink may assess that part of your home as an asset and you will need to declare the income. You may also need to pay tax on the income you earn (of course you can claim the associated expenses such as internet, utilities, repairs, interest on a home loan and depreciation on furnishings) for the area of the house you have rented out. When you sell the property in the future you may also need to pay Capital Gains Tax on the home or the part that you have rented. In the current environment of Covid-19 this may not be a viable short-term solution as very few people are travelling and there is a risk of infection.

Take advantage of the work bonus incentive

If you can continue working, perhaps on a casual, part-time or even seasonal basis then you can take advantage of the work bonus incentive which increases the amount of income someone over Age Pension age can earn by $300 per fortnight before it affects your pension entitlement. The work bonus amount goes on top of the pension income test free area, which means that a single age pensioner can earn up to $474 per fortnight and still receive the maximum rate of pension.

What’s the catch? I hear you say. Well, the $300 per fortnight of work bonus can only be applied to work you do in an employer/employee type relationship such as salary, wages, leave payments, commissions, employment-related fringe benefits and bonus payments. It can also apply to income earned through self-employment as long as the work involves personal exertion, for example, bookkeeping or gardening would qualify but managing investments wouldn’t. And you cannot apply the work bonus to other types of income such as income you earn from your investments or income streams such as superannuation pensions or annuities.

But it gets better. Any unused part of the $300 fortnightly work bonus amount is held in a Work Bonus income bank and can be used to offset future income from work under the pension income test. The work bonus income bank is not time-limited, so unused amounts can be carried forward into future years.

So, if you are looking at ways to supplement income these are a few ideas to ponder.

Firstly take stock of your current investments. One of the simplest ways to earn more income is to make sure that you have the rights investments. Many people think that cash and fixed interest are risk-free, there’s no such thing as a risk-free investment. Cash and fixed interest carry the very real risk that your investments won’t generate the returns you need to meet your cash flow needs and may not keep pace with inflation – while the account balance may not change its buying power does.

If you get a pension, make sure you understand where you sit with both the income and asset test and remember that if you earn more than the deeming rates on your investments it won’t affect your pension but it will give you more money in your pocket, if you earn less then your pension is being reduced based on the income you never got.

If the opportunity exists to work on a part-time, casual or even occasional basis then the work bonus and any unused amount in your income bank could substantially reduce or even remove the assessment of that income.

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.