In addition to your age there are three major considerations upon which your eligibility for the Age Pension is assessed; the income test, the assets test, and your residency status. Today we share the first of a three-part explanation of how these critical tests work and the fine print that ultimately counts you in or out.
We’re starting with the assets test as this is the one about which there is the most confusion – as well as the test that affects most applicants. Next week we will discuss the finer points of the income test and the pension work bonus and in our last enews this month we’ll look at what it means to be an Australian resident for purposes of pension assessment.
The first point worth noting about the assets test is that the thresholds vary for singles and couples, so having a clear idea of how Centrelink deems your relationship status is critical to ensuring your application or request for review is soundly based. We wrote about this recently, so here’s a link to refresh your understanding of the singles-couples definitions used by Centrelink.
Keeping up with current thresholds is also really important. These thresholds are reviewed by the Department of Social Services (DSS) every three months. Regular readers of Retirement Essentials enewsletters know we always report on any changes. And, even more importantly, all our calculators are updated on the day the amounts change, so any checks of your eligibility will always be up to date.
Assets: what’s in – and out?
Let’s start with assets test exemptions (referred to as ‘exempt assets’) which are mainly related to property or accommodation:
- principal home (and surrounding land up to two hectares on the same title)
- principal home, (if the applicant/s vacate it for up to 12 months or two years if entering a care situation)
- the proceeds from the sale of your principal home are exempt for 12 months from the sale date
- any property or money left to applicant/s in an estate, which the applicant/s can’t get for up to 12 months
- residential aged care accommodation bonds
- some pre-paid funeral contracts
Such investments, including a partner’s assets, are automatically included in a couple assessment. They include:
- Superannuation investments in an accumulation account (BUT if your partner is under age pension age, their super is not counted)
- Income streams
- Shares and managed investments
- Business or trust assets
- Loans to other people or businesses
- Some funeral investments (others may be partially or fully exempt)
- Assets that you have given away to children or others (referred to as gifting)
- Special disability trusts
Other assets which are also assessed include cars, boats and household contents. It is important to not overvalue these items, rather to understand their market value as if they needed to be sold tomorrow.
Can reducing your assets change Age Pension eligibility?
Applicants cannot simply give away assets in order to achieve eligibility. There are, of course, rules which apply to gifting and some applicants may be able to successfully reduce assets and increase their pension payment. Should you exceed these gifting limits, you can be deemed to continue to hold a ‘deprived asset’ and your eligibility will be reassessed with such assets included.
Some retirees reduce their asset levels by spending on renovations, for example. As always there is an upside and a downside. You might enjoy your new-look home, as well as a gain in the value of this residence. But you need to factor in the related loss of income from the super, cash or shares you used to achieve this.
Others consider using liquid assets to pay down a mortgage. Again, there are positives and negatives. The money foregone is no longer earning income – you will need to assess the trade off if the mortgage interest saved and extra pension dollars gained are more or less than the income you will no longer receive. Read more on the rules associated with this strategy here.
Remember, also, that assets held outside Australia and any debt that is owed to you are also deemed to be declarable assets.
And read this week’s Jargonbuster to learn more about the taper rate, which is applied to those whose assets exceed the full Age Pension cut off point. Recheck your entitlement by ensuring your valuations are accurate – in particular that your car or home contents are not inflated. You can also check how your assets affect your entitlements on our free eligibility calculator.
This article is provided by Retirement Essentials Representative Number: 001260855. We are an authorised representative of SuperEd Pty Ltd ABN 88 118 480 907 AFSL #468859. This information is not intended as financial product advice, legal advice or taxation advice. It does not take into account your personal situation, goals or needs and you should assess your own financial situation, consider if the information is suitable for you and ensure you read the relevant Product Disclosure Statement (PDS) if you choose to make any changes to your financial situation. It is always advisable to consult a financial adviser before making financial decisions.