Tax with Max: Understanding the age pension

Calculating pension payments for a homeowning couple with assets inside and outside of super.

 Summary: A homeowning couple who expect to have \$400,000 in super and \$300,000 in cash on retirement may wish to understand how much age pension they will receive. The income test for the age pension features a lower threshold, above which a person’s pension is decreased, and an upper threshold, above which no age pension is received. Age pension received also depends on the assets test. Key take-out: A couple in this situation with a certain amount of other assets such as cars and household contents would receive a small age pension under both the current system and the proposed changes to the assets test announced in this year’s budget. Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.

Working out the age pension

My husband and I own our own home; will have approximately \$400,000 in super on retirement in 10 years. We are also saving and aiming for a target of \$300,000 in cash. We were intending to draw down each year \$20,000 of our super. Is the income test based on the interest on savings or only related to income from employment? If we ceased working at 65 how much age pension would we receive?

Answer: The current income test for the age pension works on the basis of two thresholds. Income counted by Centrelink below the lower limit results in the full age pension being received; once income exceeds the upper limit no age pension is received.

The current thresholds are as follows:

Family Situation

Lower Threshold

Upper Threshold

Single

up to \$162 p/f \$4,212 pa

\$1,882.40 p/f \$47,382 pa

Couple (combined)

up to \$288 p/f \$7,488 pa

\$2,881.60 p/f \$74,921 pa

Illness separated Couple (combined)

up to \$288 p/f \$7,488 pa

\$3,728.80 p/f \$96,949 pa

Where a person’s income exceeds the lower threshold their fortnightly pension is decreased by 50 cents in the dollar of the excess income earned for a single person, and 25 cents in the dollar each for both members of a couple.

This current income test was introduced on September 20, 2009. Transitional arrangements were introduced at that time to ensure no existing pensioner would be worse off as a result of the changes. These transitional rules use the old reduction factor, of 40 cents in the dollar for a single people and 20 cents in the dollar for couples, to calculate the effect on a pension under the income test.

There are three types of income counted by Centrelink. The first of these is actual income. Included in this category are such things as net business income, income distributed from trusts and private companies, amounts of salary sacrificed as super contributions, net rental income and income received from boarders and lodgers.

The second type of income is deemed income which is the type that you will more than likely be most affected by. Rather than counting the actual income received from financial assets an income is deemed to be earned. Where a pensioner earns less than the deemed income they are worse off, where they earn more they are better off.

Investments included as financial assets include the following:

• bank, building society and credit union accounts
• term deposits and debentures
• friendly society bonds
• managed investments
• listed shares and securities
• gold and other bullion
• superannuation account balances when the member is of pension age
• loans to people and other entities such as trusts and companies
• proceeds from the sale of a home not counted under the assets test

From January 1, 2015 superannuation accounts in pension phase are now counted as a financial asset and have the deeming rates of interest applied to them. Once a total value for all financial investments is arrived at there are two levels of deeming rates applied for singles and another set for couples.

The deeming rates applying now are as follows:

Family Situation

Rate Per Annum

Financial Assets

On Excess Rate

Single

1.75%

first \$48,000

3.25%

Couple (where at least one person is getting a pension)

1.75%

first \$79,600

3.25%

The third type of income is adjusted actual income received. This type of income only included account-based pensions where the actual pension received was reduced by a purchase price. As you will be commencing a pension under the new rules, where the value of a pension account is counted as a financial asset and included in the deeming system, this adjusted income type will not apply to you.

There is a new adjusted actual income that effectively came into existence on September 20, 2009. This occurred as a result of the old work bonus system ceasing and a new work bonus being introduced.

Under this new work bonus system a person does not actually have to work to receive the benefit of the bonus. The bonus amount is \$250 per fortnight. Under the new system the \$250 per fortnight is deducted from a person’s salary or wages. If a person does not work the work bonus accumulates until it reaches a maximum of \$6,500.

If a person is working the fortnightly amount they earn is decreased by the \$250 allowance amount. Where the amount earned is less than \$250, the difference between the amount earned and the \$250 bonus amount is added to the work bonus balance. Where the amount earned is more than \$250 the income earned is reduced by the \$250, and is further reduced by any work bonus balance that has accumulated.

If you decided to stop working altogether once you turn 65 the amount of income counted by Centrelink under the income test would be the deeming rates applying to your superannuation and cash at that point in time. Under the current deeming rates the first \$79,600 of financial assets would be deemed to earn 1.75 per cent and the excess would be deemed to earn 3.25 per cent.

The deemed income counted by Centrelink would amount to \$21,556, and after allowing for the first threshold your excess income would be \$14,068, resulting in a reduction to the couple rate for the age pension of \$3517 each per annum.

The amount of actual age pension you would receive depends on which test produces the greatest reduction. The other test that you would have to pass is the assets test. Under this test the full pension is currently received where an individual has total assets of less than \$205,500 if they are a homeowner and \$354,500 if they are a non-home owner. Couples receive the full pension if their assets are under \$291,500 and own a home, and if their assets are under \$440,500 if they do not own home.

The assets that are counted under this test are virtually all assets except your home. This means in addition to the \$400,000 in superannuation and the \$300,000 in cash, the value of your car, household contents and any other assets you have will be counted. On the basis that your cars are not worth more than \$50,000, your home contents are worth \$10,000, and you do not have any other assets, under the current system you would be receiving a small age pension.

However under the proposed changes to the assets test announced in this year’s budget, where the upper limit at which no pension is payable for a couple will drop to \$823,000 from January 1, 2017, you will still be eligible for some age pension as your total assets would amount to \$760,000.

The reduction in the age pension under the assets test is the amount by which the total assets exceed a lower limit. If the changes are introduced on January 1, 2017 that lower limit will be \$375,000 for couples. The reduction in the age pension under the new assets test will be \$3 per fortnight for every \$1000 the total assets exceed the lower threshold.

This means if you have assets of \$760,000 by the time you retire you have excess assets of \$385,000, which would result in a reduction in your age pension of \$15,015 each per annum. This would mean the assets test would produce the largest reduction in your age pension and would apply.

There are number of retirement planning strategies open to you before you reach retirement. You should seek advice from a professional that specialises in this area.

Max Newnham is a partner with TaxBiz Australia, a chartered accounting firm specialising in small businesses and SMSFs. Also go to www.smsfsurvivalcentre.com.au.

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

Do you have a question for Max? Send an email to askmax@eurekareport.com.au