Super and the pension: What you need to know

For hard-working Aussies, the Age Pension is repayment for a life spent shelling out what are high levels of direct tax compared to other developed countries.

But the introduction of superannuation in 1992 complicated matters for today’s retirees, because it meant that most people must balance the income they receive from their super savings with their eligibility for the pension.

The pension and super systems are poorly integrated, with many people left confused about their entitlements, even when they are close to or already in retirement.

But it’s key that you understand how your super and the pension interact because this information will help you get the most out of the retirement income stream products that many Australians choose to fund their retirement lifestyle. 

From July 1, the minimum age of pension entitlement will be 65 years and 6 months, with that age gradually increasing until it hits 70 at July 1, 2035. You must also have been an Australian resident for at least 10 years in total, with no break in your residence for at least five of those years, and currently residing in Australia.

But meeting the age and residency tests isn’t sufficient to receive the Age Pension. The Department of Human Services (DHS), through Centrelink, assesses any income you receive from any source, including from your super savings, and the value of any assets you own other than the family home via what are known as the income and asset tests.

Whichever test apportions you the lowest amount of Age Pension is the test the DHS will use to determine your payments.

Age Pension income test

To determine what income you receive in retirement, the DHS assesses financial investments you own, including savings and term deposit accounts, managed investments and loans, listed shares and other securities, retirement income streams, and gifts.

To calculate the income from your assets, the DHS uses a system of ‘deeming rules’ that assume your investments are earning a certain rate of return, even if they’re not actually earning that rate. (If they do earn over the deeming rate, that extra income isn’t assessed.)

For singles who receive the Age Pension, the first $49,200 of your combined assets is deemed to earn 1.75 percent a year, and any amount over that is deemed to earn 3.25 percent. The same deeming rates are applied to combined investments owned by couples of whom one receives the pension, but the first tranche is set at $81,600.

If you’re in a couple but neither of you get the pension, the first $40,800 for your own and your share of jointly-owned assets is deemed to earn 1.75 percent, with the amount above that deemed to earn 3.25 percent.

You can receive an income other than the pension of up to $164 a fortnight for singles and $292 for couples and still qualify for a full Age Pension.

To receive a part pension, your income must be under $1,940.60 for singles and $2,970.40 for couples per fortnight. For any income above that level, your pension payment will be reduced by 50 cents for every dollar over the limit.

But for this to apply, you must also pass the asset test.

Age Pension asset test

As well as an income test, the DHS assesses your assets, including the value of property that is not your family home, a granny flat or retirement village housing you may live in, financial investments, retirement income streams, and even smaller assets such as cars and caravans, life insurance policies and household contents, depending on your circumstances.

There’s an interaction between the income and asset tests when it comes to account-based super products. Once you reach pension age, the retirement income stream you draw is included in the income test, and the value of your super balance counted within the asset test.

If you do receive such an income, you need to fill out the DHS’s ‘details of income stream product form’ to tell it how much you receive. How the income is assessed depends on the age at which you claim the Age Pension and when you started drawing down your income stream. Your super fund or financial adviser can help you understand in detail how your retirement income stream will be considered with regard to the Age Pension.

More broadly, however, there limits to the value of assets you can hold and continue to receive the pension.

To receive a full pension, singles who own their own home can’t have assets worth more than $250,000, while single non-homeowners can hold no more than $450,000 worth of assets. For couples on full pensions, the limits are $375,000 for homeowners $575,000 for non-homeowners. For every $1,000 by which you exceed the asset limit, your fortnightly pension payment will be cut by $3.

For single part-pensioners, your pension payments will cut off if your assets are worth more than $546,250 (for homeowners) and $746,250 (for non-homeowners). For couples, the cut-off point rises to $821,500 and $1,021,500.

You can reduce your assets to improve your chances of qualifying for some pension payment, through gifting the assets, but the amount you can do this by is limited to $10,000 in any financial year and $30,000 in total over five years.

Depending on the results of your income and asset tests, you could receive a payment of up to $888.30 for single full pensioners (including supplements, as at June 8) and $1,339.20 for couples on a full pension.

There’s a lot of detail on this issue to take in, but making sure you understand the Age Pension tests and how they work with your superannuation is vital to maximising your income in retirement.

Have you been able to make a mix of income streams work for you in retirement?