By Liam Shorte and Richard Livingston 19 Mar 2015

Super and the age pension: How the tests work

If you’re eligible for the age pension it’s important to understand the tests. We highlight what you need to know.

Snapshot

  • The Assets Test and Income Test explained
  • Income Test rules change for pensions pre and post-1 January 2015
  • We highlight why staying under old Income Test rules is crucial

If you’ve turned 65 you’re potentially eligible for the age pension and Pensioner Concession Card.  Two tests determine whether you get the pension and the amount you receive: the Assets TestOne of the two tests that determine eligibility for the Age Pension (the other is the Income Test). The test that applies (dominates) is the one which gives the worst result. Details of how the Assets Test calculations and limits can be found at the Department of Human Services website. and Income TestOne of the two tests that determine eligibility for the Age Pension (the other is the Assets Test). The test that applies (dominates) is the one which gives the worst result. Details of how the Income Test calculations and limits can be found at the Department of Human Services website.. We’ll explain these below.

Superannuation income streams (account based pensionsThe 'usual' superannuation pension you receive on retirement. Your account contains an amount from which you can make withdrawals (subject to set minimums). These withdrawals (the pension) are generally tax-free for those over 60.) used to be treated more generously (for the age pension tests) than other financial assets. Due to changes that came into effect on 1 January 2015, your super account will probably be one of the main items that determines whether you qualify for the age pension and how much you receive.

The previous rules continue to apply to super pensions in place at 1 January 2015 (assuming you also qualified for the age pension or other entitlement) so we’ll take a look at both the old rules and the new.

The rules as they are now

The Assets TestOne of the two tests that determine eligibility for the Age Pension (the other is the Income Test). The test that applies (dominates) is the one which gives the worst result. Details of how the Assets Test calculations and limits can be found at the Department of Human Services website. and Income TestOne of the two tests that determine eligibility for the Age Pension (the other is the Assets Test). The test that applies (dominates) is the one which gives the worst result. Details of how the Income Test calculations and limits can be found at the Department of Human Services website. operate on a ‘worst of’ basis. Your entitlement is based on the test that gives you the least age pension (referred to as the ‘dominant’ test).

Under the Assets TestOne of the two tests that determine eligibility for the Age Pension (the other is the Income Test). The test that applies (dominates) is the one which gives the worst result. Details of how the Assets Test calculations and limits can be found at the Department of Human Services website., if you’re single and own your own home, your assets (excluding your place of residence) must be less than $202,000 to get the full age pension. To get anything at all, your assets must be less than $775,500 (the thresholds are $286,500 and $1,151,500 for home owning couples).

Details of other key thresholds for the Assets TestOne of the two tests that determine eligibility for the Age Pension (the other is the Income Test). The test that applies (dominates) is the one which gives the worst result. Details of how the Assets Test calculations and limits can be found at the Department of Human Services website., updated limits and items included or excluded can be found on the Human Services website.

Between these two asset thresholds you’re entitled to receive a partial age pension, determined by Centrelink. You can use an online calculator (Liam uses www.yourpension.com.au) to estimate the amount you’re likely to receive.

The Income TestOne of the two tests that determine eligibility for the Age Pension (the other is the Assets Test). The test that applies (dominates) is the one which gives the worst result. Details of how the Income Test calculations and limits can be found at the Department of Human Services website. is more complicated since financial assets are ‘deemed’ to earn a certain amount of income. It’s not necessarily a reflection of what you earn.

The ‘cut-off’ income (where no age pension is paid) for a single is currently $1,880.40 each fortnight ($2,877.60 for a couple). Singles can earn up to $160 a fortnight ($284 for couples) and get the full pension. But above this level it gradually reduces until you reach the cut-off point). More details (and updated limits) can again be found on the Human Services website.

The Income TestOne of the two tests that determine eligibility for the Age Pension (the other is the Assets Test). The test that applies (dominates) is the one which gives the worst result. Details of how the Income Test calculations and limits can be found at the Department of Human Services website. calculation is a bit complicated, so let’s walk through it.

Deeming

Under the deeming rules, financial investments such as your super pension account (account based pensionThe 'usual' superannuation pension you receive on retirement. Your account contains an amount from which you can make withdrawals (subject to set minimums). These withdrawals (the pension) are generally tax-free for those over 60.), shares and term deposits are treated as earning a certain rate of return, regardless of what is actually earned. Depending on the size of the investments, Centrelink will currently (from 20 March 2015) deem them to have earned 1.75 per cent or 3.25 per cent (see Table 1).

To the ‘deemed’ income on financial assets, most people will have to add net investment property rental income and any income over $250 each fortnight from employment.

The deeming rates are set based on prevailing interest rates, so with today’s low rates, the Assets TestOne of the two tests that determine eligibility for the Age Pension (the other is the Income Test). The test that applies (dominates) is the one which gives the worst result. Details of how the Assets Test calculations and limits can be found at the Department of Human Services website. tends to trump the Income TestOne of the two tests that determine eligibility for the Age Pension (the other is the Assets Test). The test that applies (dominates) is the one which gives the worst result. Details of how the Income Test calculations and limits can be found at the Department of Human Services website. a lot of the time. Let’s take a look at a couple of examples.

Case study: Single homeowner with $500,000 in financial assets

We’ll start with the case of Linda, a 70 year old single homeowner with a $450,000 super pension account and $50,000 in term deposits outside of super.

Linda’s home is excluded from the calculation so (as she’s under the $775,500 upper limit and above the $202,000 ‘full pension threshold’) she’ll qualify for a part pension based on the Assets TestOne of the two tests that determine eligibility for the Age Pension (the other is the Income Test). The test that applies (dominates) is the one which gives the worst result. Details of how the Assets Test calculations and limits can be found at the Department of Human Services website.. The calculation is best done with an online calculator.

Based on the Assets TestOne of the two tests that determine eligibility for the Age Pension (the other is the Income Test). The test that applies (dominates) is the one which gives the worst result. Details of how the Assets Test calculations and limits can be found at the Department of Human Services website. alone she’d get $413 each fortnight (roughly half the maximum rate of $860).

Let’s turn now to the Income TestOne of the two tests that determine eligibility for the Age Pension (the other is the Assets Test). The test that applies (dominates) is the one which gives the worst result. Details of how the Income Test calculations and limits can be found at the Department of Human Services website. (refer to Table 2). We’ve worked out that Linda’s income – all based on deeming rates – is $15,530 a year, or $596 per fortnight. For each dollar over $160 of fortnightly income, she loses 50 cents of the maximum age pension. So under the Income TestOne of the two tests that determine eligibility for the Age Pension (the other is the Assets Test). The test that applies (dominates) is the one which gives the worst result. Details of how the Income Test calculations and limits can be found at the Department of Human Services website. she’d get $642 each fortnight ($860 maximum minus $218).

Since the result under the Assets TestOne of the two tests that determine eligibility for the Age Pension (the other is the Income Test). The test that applies (dominates) is the one which gives the worst result. Details of how the Assets Test calculations and limits can be found at the Department of Human Services website. is worse, it’s the Assets TestOne of the two tests that determine eligibility for the Age Pension (the other is the Income Test). The test that applies (dominates) is the one which gives the worst result. Details of how the Assets Test calculations and limits can be found at the Department of Human Services website. that is dominant and determines Linda’s age pension. So she’d receive $413 each fortnight.

Let’s turn now to a case where the Income TestOne of the two tests that determine eligibility for the Age Pension (the other is the Assets Test). The test that applies (dominates) is the one which gives the worst result. Details of how the Income Test calculations and limits can be found at the Department of Human Services website. is dominant.

Case study: Couple homeowners with $275,000 in financial assets

John and Carol are a married, home owning couple with $250,000 in their super pension accounts and $25,000 in term deposits outside of super.

Their total assets ($275,000) are below the $286,500 threshold, so they'd collect the full age pension for a couple ($1,296 per fortnight) under the Assets TestOne of the two tests that determine eligibility for the Age Pension (the other is the Income Test). The test that applies (dominates) is the one which gives the worst result. Details of how the Assets Test calculations and limits can be found at the Department of Human Services website..

The Income TestOne of the two tests that determine eligibility for the Age Pension (the other is the Assets Test). The test that applies (dominates) is the one which gives the worst result. Details of how the Income Test calculations and limits can be found at the Department of Human Services website. tells a different story.

Table 3 shows the couple’s income for the purpose of the Income TestOne of the two tests that determine eligibility for the Age Pension (the other is the Assets Test). The test that applies (dominates) is the one which gives the worst result. Details of how the Income Test calculations and limits can be found at the Department of Human Services website.. Their total fortnightly income of $297 is over the $284 threshold which a couple can earn without the age pension being affected.

The Income TestOne of the two tests that determine eligibility for the Age Pension (the other is the Assets Test). The test that applies (dominates) is the one which gives the worst result. Details of how the Income Test calculations and limits can be found at the Department of Human Services website. would knock $7 off the maximum pension rate, so they’d be entitled to $1,289 per fortnight. This is the worst result of the two tests, so the Income TestOne of the two tests that determine eligibility for the Age Pension (the other is the Assets Test). The test that applies (dominates) is the one which gives the worst result. Details of how the Income Test calculations and limits can be found at the Department of Human Services website. is the dominant test for John and Carol.

Impact of rising interest rates

The impact for John and Carol isn’t much, but that’s at the current low deeming rates. If rates increased to, say, 5 per cent and 6.5 per cent (at the same thresholds) then John and Carol would only get $1,056 each fortnight. In our first example, Linda would see the Income TestOne of the two tests that determine eligibility for the Age Pension (the other is the Assets Test). The test that applies (dominates) is the one which gives the worst result. Details of how the Income Test calculations and limits can be found at the Department of Human Services website. become dominant, reducing her age pension to around $330 each fortnight (from $413 at current rates).

The effect of the Income TestOne of the two tests that determine eligibility for the Age Pension (the other is the Assets Test). The test that applies (dominates) is the one which gives the worst result. Details of how the Income Test calculations and limits can be found at the Department of Human Services website. with rising interest rates shows why it’s so important for those potentially affected to keep their current super pension accounts treated under the old rules instead.

Let’s turn to the old rules now.

Pre 1 January 2015 rules

If you were collecting the age pension (or certain other Centrelink benefits) and a super pension before 1 January this year, the rules (for the Income TestOne of the two tests that determine eligibility for the Age Pension (the other is the Assets Test). The test that applies (dominates) is the one which gives the worst result. Details of how the Income Test calculations and limits can be found at the Department of Human Services website.) are a little different. You avoid being deemed on your super pension account (or, to put it another way, your super pension is 'grandfathered' from the new rules).

Instead, the ‘old rules’ continue to apply so long as you continue to receive the age pension (or other benefit) and your super pension at 1 January 2015 remains in place and unchanged. See Age pension: Keeping your super pension grandfathered (Premium Members only) for advice on keeping your super exempt from the new rules.

What are the old rules?

Super pension payments (and certain annuity payments) are included in the income calculated for the Income TestOne of the two tests that determine eligibility for the Age Pension (the other is the Assets Test). The test that applies (dominates) is the one which gives the worst result. Details of how the Income Test calculations and limits can be found at the Department of Human Services website. but are then reduced by a ‘deductible amount’ calculated as follows:

Deductible amount = (Original purchase price - any commutations)/Relevant Number

The Relevant Number is the life expectancy when the pension is commenced (calculated from the Australian Government life expectancy tables). The shorter the life expectancy, the less income that gets included in the Income TestOne of the two tests that determine eligibility for the Age Pension (the other is the Assets Test). The test that applies (dominates) is the one which gives the worst result. Details of how the Income Test calculations and limits can be found at the Department of Human Services website.. Table 4 shows how the deductible amount is calculated.

You can see that Peter has a larger super pension balance than John and Carol combined, but he’d still be entitled to the maximum age pension under the Income TestOne of the two tests that determine eligibility for the Age Pension (the other is the Assets Test). The test that applies (dominates) is the one which gives the worst result. Details of how the Income Test calculations and limits can be found at the Department of Human Services website. (assuming he had no other income). The deductible amount shields his entire pension payment, leaving him with zero income for the Income TestOne of the two tests that determine eligibility for the Age Pension (the other is the Assets Test). The test that applies (dominates) is the one which gives the worst result. Details of how the Income Test calculations and limits can be found at the Department of Human Services website..

Summing up

This last example highlights the importance of those on the old rules staying grandfathered – with the difference potentially being thousands of dollars a year. In Age pension: Keeping your super pension grandfathered we’ll look at the pitfalls you need to avoid to ensure you don’t come unstuck.

 

Liam Shorte is a principal of Verante Financial Planning Pty Ltd (www.verante.com.au), a corporate authorised representative of Magnitude Group Pty Ltd (AFSL 221557). This article is a general information article and to the extent it contains any financial advice it is general advice only. We recommend seeking personal advice on your own circumstances.

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