Planning for a pension

Can I do that? As this week's cover story outlines, qualifying for even $1 of age pension can be a big help in making ends meet as you are eligible for the pensioner concession card and all the discounts that come with it. If you have lost money on your investments, it may be worth reviewing your Centrelink entitlements as you could now be able to claim a higher part-pension or qualify for one if you were not eligible before.

The managing director of Eureka Financial Group, Greg Cook, says many retirees think the cut off for the pension assets test is much lower than it is.

In fact, a couple who own their own home can have $1.018 million in assets (not including their home) before they miss out, and non-home owners up to $1.153 million. For singles, the cut-offs are $686,000 and $821,000.

There is also an income test that basically allows a couple to earn up to $2522 a fortnight before losing their pension, and singles up to $1647.60.

So how can I ensure I get the maximum pension possible? The manager of advice development at ipac Securities, John Dani, says the days of using complicated strategies to gain an age pension have gone as the rules are now more straightforward. He says some people give money away or spend up on renovations (as the family home is exempt) to reduce their assets before claiming the pension but you "need to be careful not to cut off your nose to spite your face". Generally, what these people gain from Centrelink is not as much as they would have earned from investment returns on that money.

Dani says there are also limits on gifting that also apply to the five years before you receive the Centrelink benefit. You can only give away $10,000 in any financial year up to a maximum of $30,000 over a consecutive five-year period. If you exceed these limits, the excess is treated as a "deprived asset", which means you are still assessed as owning it for five years.

Dani says if you are in a relationship whereby one partner is older than the other, the younger partner's superannuation is not taken into account in determining the older partner's pension eligibility. So there may be an argument for boosting this partner's super before the older partner retires, possibly even using strategies such as splitting the older partner's super by transferring contributions to the younger partner's account.

The director of Strategy Steps, Louise Biti, says retirees also need to look at what they are earning on such things as bank accounts, term deposits and investments. "These will all be deemed to earn a certain rate of return, so you need to make sure you're at least earning the deeming rate," she says.

The deeming rate is 3 per cent on the first $44,600 for singles receiving a pension and 4.5 per cent on any investments in excess of that. For couples, the lower rate applies on the first $74,400.

Biti says allocated pensions are treated concessionally for the pension income test so there are advantages in getting money into super before you reach pension age.

She says some advisers are also using strategies involving family trusts and insurance bonds to minimise retirees' income for Centrelink purposes.

Money held in family trusts is not subject to deeming instead, the income test applies to the actual taxable income generated by the trust. If the trust invests in insurance bonds, there is no taxable income because the insurance company pays tax on the earnings and the investor receives the bond plus earnings back "tax free" after 10 years.

Biti says the benefits should be weighed against the fact that insurance bonds lock your money away for 10 years (you can redeem earlier but you lose some of the tax benefits) and the insurance company pays tax at the rate of 30 per cent.

This is higher than the rate paid by many older Australians who, thanks to the Senior Australians Tax Offset, pay little or no tax on their income.

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