Last week we went back to basics by explaining how the assets test works.
This week we share the ‘second-part’ of this important retirement income update –an explanation of the way the income test is used to assess Age Pension eligibility.
What is the income test?
The income test is one half of the means test for the Age Pension. Applicants must pass both parts of the means test, i.e. both the income and the assets test. If either one of these aspects -income or assets – results in a lower Age Pension entitlement, then that is the test which will determine how much you will be paid.
What does this mean?
Let’s say, under the income test, you qualify for a modest part-Age Pension payment of $200 per fortnight (plus supplements).
But using the assets test, you qualify for payments of $292 per fortnight (plus supplements). Your actual Age Pension will be paid at the lower rate of $200, based upon the income test results.
How does Centrelink define income?
Centrelink considers your income to come in from a few different sources, including the following:
- *Financial investments (including shares, term deposits, managed funds)
- *Income on super fund balances
- *Income stream earnings (often from account-based pensions)
- Wages or salary earnings
- Rental income
- Sole trader or partnership income
- Dividends or distributions from private trusts or private companies
- Overseas earnings (this includes non-Australian pensions)
Centrelink views the above income earned in one of two ways – either deemed or non-deemed. The items above which are deemed are marked with an asterisk(*). They generally include financial investments, super and income streams.
What are the income limits?
To be eligible for a full Age Pension:
- Singles are entitled to a full Age Pension if their income is equal to or less than $212 per fortnight or $5512 per year
- Couples are entitled to a full Age Pension if their income is equal to or less than $372 per fortnight or $9672 per year
Part-Age Pensions
For every $1 your income is over these limits your pension will reduce by $0.50 (combined amount for a couple) until it cuts out.
Cut off points – or upper income limits
Singles will no longer receive any pension entitlements if their income exceeds $2500.80 per fortnight, or $65,020.80 per year
Couples will no longer receive any pension entitlements if their income exceeds $3822.40 per fortnight, or $99,382.40 per year
How does deeming work?
Income is ‘deemed’ by applying the current Centrelink deeming rates. These rates are 0.25% on financial assets up to $62,600 (for singles), $103,800 (for couples) and 2.25% for financial assets above these amounts.
You may actually earn more or less than this deemed amount. At the moment this calculation is advantageous for retirees as they are likely to be earning much more than 2.25% – perhaps 5% or higher on fixed term bank deposits and higher again on super fund returns. But that is of no concern to Centrelink, it will assess you on the official deemed rates which are set by the relevant government minister and in place until 30 June 2025.
How is total income calculated when including the Work Bonus?
The Work Bonus credit can be complicated to apply because it assumes you earn wages at a steady rate across the year, which is not true in every case. Combining the income which is deemed with non-deemed income, and then applying the Work Bonus can seem tricky. Steven Sadler from our Customer Services Team spells out how this works:
How much can singles earn?
Q. How much can a single full Age Pensioner earn (ALL UP) per annum before moving to a part-Age Pension?
In the first year a single can earn up to $17,312:
- Firstly, there is an income-free threshold for the Age Pension. This is $212 per fortnight or $5512.
- Because you are eligible for the Age Pension you are allowed a Work Bonus credit of $300 per fortnight or $7800 across the year.
- And then there is the bonus $4000.
HOWEVER from Year Two onward, it is only $13,312 because you only get the $4000 bonus once. After that has been used, you are only entitled to $300 per fortnight, which is $7,800 per year (plus the above income-free amount of $5512).
What about couples?
Q. How much can a couple who are full Age Pensioners earn (ALL UP) per annum before moving to a part Age Pension?
In the first year a couple (presuming both are Age Pension age and earning income) can earn $33,272:
- Couples have a higher income-free threshold of $372 per fortnight or $9,672 combined
- Presuming both are eligible for the Age Pension then you are each allowed a Work Bonus credit of $300 per fortnight or $7800 across the year.
- And then there is the bonus $4,000 each.
Find out more details on the Work Bonus.
Three mistakes to avoid
Again we checked in with the Retirement Essentials advisers and Customer Services Team to discover the most common ‘rookie errors’ when it comes to the income test. Three mistakes stood out in particular:
- Thinking that income only relates to employment earnings and forgetting to factor in deemed income on assets.
- Assuming that taxable income with the Australian Tax Office is the amount that Centrelink will use for their assessment. This often happens with people with rental income that is heavily offset under ATO rules but not nearly as generously treated by Centrelink.
- Believing that what you draw from your Account-Based Pension is assessable income, rather than understanding that deeming is applied to the balance of your account. This means if you draw down more or less, it has no impact whatsoever on your overall entitlement.
There is a lot to take in when trying to understand the income and assets tests. Retirement Essentials can make this a lot easier with the following support services:
- The free Age Pension Entitlement Calculator which applies all of the above rules on your behalf so you can quickly work through your potential eligibility with both income and assets tests factored in.
- Adviser consultations to assist you to maximise your entitlements
- Retirement forecasting consultations
which share scenarios of the way your retirement savings can be made to last across your retirement journey.
We’d love to work with you to help you achieve your optimum financial outcomes as well as financial peace of mind.
Are there any aspects of income that still concern you?
Please let us know if any points need more explanation?
