What everybody should know about changes to Age Pension Assessment

The Age Pension provides income support payments and access to a range of concessions for Australians aged 65 years and over.

In order to determine eligibility for the Age Pension, an individual is means tested under the ‘Income Test’ and ‘Assets Test’. The test that results in the lowest Age Pension entitlement is applied.

A person may be eligible for the ‘full’ Age Pension or ‘part’ Age Pension depending on their level of income and assets.

How is the Age Pension Assessed?

Currently the Income and Assets test thresholds are as follows:

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Income Test

Single  
Fortnightly IncomeUp to $162Over $162
Reduction in PaymentNil – full entitlementAge Pension payment reduced by 50 cents per fortnight for every dollar over $162 of income.

 

Couple  
Fortnightly IncomeUp to $288 (combined)Over $288 (combined)
Reduction in PaymentNil – full entitlementAge Pension payment reduced by 50 cents per fortnight for every dollar over $288 of income (combined).
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In short, a single person can earn up to $48,942 p.a. before their Age Pension payment reduces to $0.

A couple can earn up to $74,921 p.a. (combined) before their Age Pension payment reduces to $0.

 

Assets Test

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Single – Homeowner  
Level of AssetsUp to $205,500Over $205,500
Reduction in PaymentNil – full entitlementAge Pension payment reduced by $1.50 per fortnight for every $1,000 dollars in assets over $205,500
Single – Non-Homeowner  
Level of AssetsUp to $354,500Over $354,500
Reduction in PaymentNil – full entitlementAge Pension payment reduced by $1.50 per fortnight for every $1,000 dollars in assets over $354,500

 

Couple – Homeowners  
Level of AssetsUp to $291,500Over $291,500
Reduction in PaymentNil – full entitlementAge Pension payment reduced by $1.50 per fortnight for every $1,000 dollars in assets over $291,500
Couple – Non-Homeowners  
Level of AssetsUp to $440,500Over $440,500
Reduction in PaymentNil – full entitlementAge Pension payment reduced by $1.50 per fortnight for every $1,000 dollars in assets over $440,500

 

In short, a single person can have assets of up to $779,000 (homeowner) or $928,000 (non-homeowner) before their Age Pension payment reduces to $0.

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A Couple can have combined assets of up to $1,156,500 (homeowner) or $1,305,500 (non-homeowner) before their Age Pension payment reduces to $0.

 

Example – Case Study

Let’s look at an example of a married couple, Patrick and Mary, aged 67 and 65 respectively. They are also homeowners.

 

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Their assets include:

Home: $800,000

Contents: $ 10,000

Vehicles: $ 20,000

Bank Account: $ 30,000

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Term Deposits: $ 50,000

Superannuation Pension #1 (commenced prior to 1/1/15): $400,000

Superannuation Pension #2 (commenced after 1/1/15): $400,000

Income sources include:

Superannuation Pension #1: $ 20,000 p.a. (deductible amount $18,140 p.a.)

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Superannuation Pension #2: $ 20,000 p.a. (no deductible amount – post 1/1/15)

Assessment for the Assets Test is:

Home: Nil – excluded

Contents: $ 10,000

Vehicles: $ 20,000

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Bank Account: $ 30,000

Term Deposits: $ 50,000

Superannuation Pension #1 (commenced prior to 1/1/15): $400,000

Superannuation Pension #2 (commenced after 1/1/15): $400,000

Total Assessable Assets: $910,000

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Under the assets test, Patrick and Mary would be eligible for an Age Pension payment of $184.52 per fortnight, each.

Assessment for the Income Test is:

Deemed Income

Bank Account

Term Deposits

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Super Pension #2: $14,391 p.a.

Super Pension #1 (commenced prior to 1/1/15):  $ 1,860 p.a.

Total Assessable Income: $16,251 p.a

Under the income test, Patrick and Mary would be eligible for an Age Pension payment of $335.90 per fortnight, each.

Therefore, because the asset test results in the lower entitlement, this is the test that will be applied.

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Patrick and Mary will be eligible for $184.52 per fortnight, each or $4,797.52 per annum, each. 

 

Proposed Changes to Assessment

In the 2015 May Budget, the Government announced its intentions to rebalance the Assets Test. Ultimately; the rebalance is designed to make more people with fewer assets eligible for the full Age Pension and less people with more assets eligible for the part Age Pension.

To do this, they will be increasing the lower Asset Test threshold and lowering the upper Asset Test Threshold. These changes are due commence from 1 January 2017.

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Why is this important?

These are the most significant changes that have swept Age Pension assessment since 2007. Back then, the changes actually helped those with higher asset bases. The proposed changes are largely reversing the 2007 changes back to how they were previously.

These changes are extremely important from a retirement planning perspective. If you have done any modelling on your retirement outcome in relation to your retirement date and your expected retirement income, it is likely that Age Pension entitlements would have been included in those projections. The changes to the means testing of the Age Pension from 1 January 2017 is therefore likely to have a significant impact on your retirement modelling projections. You may find that you will need to work longer and/or settle for a lower retirement income as a result of this. Conversely, if your asset base is on the lower side, you may be better positioned for retirement than initially thought.

Either way, it is highly recommended that you address your retirement plan with an adviser to ensure that expectations are aligned with reality.

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Previous Example post 1 January 2017

Here we take a look at our earlier example of Patrick and Mary and how the proposed changes affect their Age Pension entitlements.

Remember, Patrick and Mary had $910,000 in assessable assets and were eligible for $184.52, each, per fortnight.

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Due to the changes in Asset Test assessment, Patrick and Mary will no longer be eligible for any Age Pension entitlements, as their asset base will exceed the upper threshold of the ‘Assets Test’.

This will reduce their combined income by $9,595 p.a.

 

Ways to Reduce Assessable Assets

There are a few ways of reducing the level of assets assessed for Age Pension purposes.

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Gifting – Gifting involves giving away money or assets (generally to family) so that it is no longer assessed for Centrelink purposes. However, only up to $10,000 p.a. and a maximum of $30,000 over a five year period will be free from assessment under the gifting provisions. Any amount that exceeds these limits will continue to be assessed for five years after the gift.

Funeral Bonds – Burial plots, prepaid funeral expenses and certain types of funeral bonds up to $12,250 can be exempted from Centrelink assessment.

Annuities – Certain annuity income streams have a reducing capital value each year, which means that the amount assessed for ‘Assets Test’ purposes reduces each year, potentially improving your Age Pension entitlements. Annuity income is generally also assessed using the ‘deductible amount’ method, which is beneficial under the ‘income test’.

Renovations – Rejuvenate your home and improve your energy efficiency. The money spent on updating your home is not means tested for Centrelink purposes. The investment may provide better enjoyment of your home and/or cash savings year-on-year.

In any case, it is imperative that you discuss your options with an adviser prior to implementation to ensure it is suited to your personal circumstances.

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This article and its contents are general in nature and does not constitute or convey personal advice. It has been prepared without consideration of anyone’s financial situation, needs or financial objectives. Formal advice should be sought from a licenced financial planner before acting on the areas discussed. The authors and distributors of this document accept no liability for any loss or damage suffered by any person as a result of that person, or any other person, placing any reliance on the contents of this article. 

Important information: The information provided on this website is of a general nature and for information purposes only. It does not take into account your objectives, financial situation or needs. It is not financial product advice and must not be relied upon as such. Before making any financial decision you should determine whether the information is appropriate in terms of your particular circumstances and seek advice from an independent licensed financial services professional.