Are you eligible for the Age Pension?

Matthew McCabe, Financial Planner and Aged Care Specialist at Rethink Financial Planning

10 November 2015

The Age Pension is the Government (or taxpayer-funded) allowance paid to those people who cannot fully support themselves once they have reached retirement age.

In most cases the age pension is income and assets tested, which means the amount you are entitled to receive will depend on any other income you receive (from super, investments and paid work) and on the assets you own.

There have been a plethora of changes to the Age Pension eligibility criteria in recent years, which the Government has made to ensure the pension is more sustainable. With reductions to the upper asset thresholds, increases to the lower asset thresholds, and with the ability to change the (deeming) rate at which income on your assets are assessed, the Age Pension eligibility system can be quite complex.

Furthermore, with varying assets, income from employment, superannuation and investments, calculating your entitlements can sometimes become confusing and overwhelming, especially when coupled with the personal exam or “application” that Centrelink require you to complete.

In addition, should you not be eligible for Age Pension benefits, you may be entitled to the Commonwealth Seniors Health Card. This card provides you with access to cheaper prescriptions (via the Pharmaceutical Benefits Scheme), and an increase in benefits for medical expenses above a certain threshold (via the Medicare Safety Net).

However, you still need to satisfy an income test, on the other hand there is no asset test to be eligible for the card. Since 20th September 2015, the income test thresholds have increased. Your annual (adjustable taxable) income must now be less than $52,273 (for a single person) or less than $83,636 (for a couple).

Let a Rethink specialist adviser support you in navigating your way through this complex maze! If you have any questions or need my support I’d be only to happy to help, please phone me on 02 4962 4440 or email: matthew.mccabe@rethinkfinancial.com.au.

Matthew McCabe, Financial Planner and Aged Care Specialist at Rethink Financial Planning

June 6, 2014

The government recently passed legislation which will change the way superannuation income streams are assessed for social security from 1 January 2015. This change coupled with proposed changes outlined in the Federal Budget on Tuesday, in relation to the alteration deeming thresholds from 20 September 2017.

This provides an opportunity to review how your individual situation is structured, and what effect these changes will have on your specific circumstances.

Individuals should be aware that social security use several definitions of income and these definitions treat payments from income streams quite differently.

For example, the definition of income used for the Commonwealth Seniors Healthcare Card is currently based on taxable income and therefore, the assessment of income from an account based pension (allocated pension) will depend on whether the individual has turned age 60 or not.

However, the definition of income of greatest interest to most retirees, is Centrelink’s concept of ‘ordinary income’ which is used to determine entitlements to income support payments such as Age Pension payments. The definition does not rely on an individual’s taxable income, and can be significantly higher or lower than their taxable income.

The changes which commence on 1 January 2015 are to the assessment of income streams under the definition of income.

Do you want to speak directly to our retirement specialist, Matthew? Phone: 02 4962 4440 or email: matthew.mccabe@rethinkfinancial.com.au.

Current Rules

The first step in determining the income test assessment of an income stream is to establish whether it is long-term or not. Long term income streams are those that have a term of greater than five years or equal to or greater than the purchaser’s life expectancy (e.g. Allocated Pension).

For Allocated Pension, the income is assessed via a formula. This formula tries to approximate the amount of each pension payment which is a return of the contributed capital to the individual. This amount is known as the deductible amount. Only the pension payment over this ‘deductible’ amount will be assessed for Centrelink purposes.

For example;

  • Bill who is 65 years of age, retires and commences an Allocated Pension with $200,000 of his superannuation benefits.
  • Bill receives pension payments of $900 per month ($10,800 p.a.).
  • The deductible amount of this payment is $10,800 p.a.
  • Therefore, $0 p.a. is assessable for Centrelink purposes.

Age Pension entitlement $775.40 per fortnight ($20,160.49 p.a.)
(Home-owner, $10,000 worth of contents, car valued at $10,000)

Changes from 1 January 2015
The legislative changes taking effect from 1 January 2015 will result in an Allocated Pension no longer being subject to the aforementioned rules, but instead being assessed as a financial asset and subject to deeming.

Under the deeming rules, the actual income from an asset is disregarded and Centrelink calculates income according to rates and thresholds which are currently as follows;

*proposed in the Federal Budget

If this was the case in Bill’s situation, and he commenced an Allocated Pension with his superannuation benefits after 1 January 2015.
– Bill would still receive his pension payment of $900 per month.
– Age Pension entitlement of $751.98 per fortnight ($19,551.49 p.a.)

Therefore, for a 65 year old, the benefit over a 20 year period could be well in excess of $12,000!

On that analysis, it looks like the impact on pensioners is quite small and not worth reviewing your situation. However, the current deeming rates are close to the lowest they have ever been on the back of record low RBA cash rates.

If we repeat the modelling above with the current deeming thresholds but with the deeming rates from 2008 of 4% and 6%, we end up with a difference of $2,77.55 p.a. or $55,551 over 20 years.

As we can see, the difference in entitlement now is substantial. In the value for the Allocated Pensions that we have modelled, we are seeing a loss of benefits under the new system of over $2,700 p.a. comparative to the existing system.

Therefore, for a 65 year old, the benefit over a 20 year period could be well in excess of $55,000!

In addition, within the Federal Budget it is proposed the assessment of superannuation income streams will be the same for Commonwealth Seniors Healthcare Card as for Age Pension recipients and will align the measures. This proposal has outlined that the balances of superannuation income streams will be deemed from 1 January 2015 (all superannuation account based income streams held by Commonwealth Seniors Healthcare Card will be grandfathered and any income from these income streams will not be assessed).

Conclusion

The strategies available to individuals derive from the rule whereby any income streams in place on 1 January 2015, which are being paid to a Centrelink income support recipient at the time, will continue to be subject to the old rules for as long as the pension is being paid and the individual is in receipt of income support.

In addition, it is also important that individuals have their pensions set up with their provider of choice, because if they change providers after 1 January 2015, they will no longer qualify for the grandfathering and their pension will be subject to the new rules.

This is particularly important where an individual has an SMSF, which they are likely to no longer want to maintain in the foreseeable future. If they do not move their benefits before the deadline, they may find themselves maintaining an SMSF they no longer want, solely for the Centrelink benefits.

Based on this difference, it certainly becomes worthwhile reviewing your current situation to see if you would benefit from the restructure of your assets before the new rules come into effect.

Finally, this grandfathering is likely to make it more difficult for individuals in the future, as many individuals may not know whether their income stream is assessed under the old or new rules. In addition, the superannuation provider will not know either, as they will only be able to tell whether it was set up before the new rules or not. They will not know whether the individual has constantly been on income support since 1 January 2015.

As such, it will become increasingly important to seek financial advice to ensure your assets and income is structured in the most beneficial manner, whilst taking into account tax, Centrelink entitlements and the individual’s specific needs.

Do you want to speak directly to our retirement specialist, Matthew? Phone: 02 4962 4440 or email: matthew.mccabe@rethinkfinancial.com.au.

Disclaimer: This editorial provides general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your particularly investment objectives, financial situation and individual needs. Charter Financial Planning and its authorised representatives do not accept any liability for any errors or omissions of information supplied in this editorial. Charter Financial Planning Limited ABN 35 002 976 294 AFSL Licence No. 234665. Principal Address 750 Collins Street GPO Box 2830AA Melbourne VIC 3000.

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