Sharing money with your loved ones has to be one of life’s greatest joys. But being penalised for doing so seems a bit unfair. We’ve recently received many questions about gifting and loans. Maybe its associated with rising cost of living and general housing affordability? So how do you stand if you want to share your kids’ inheritance while you are still hale and hearty?
The most important thing to understand is that it matters how you manage this – and that your Age Pension entitlement could change depending upon whether you decide to give or loan money.
The best, first, step is to check your Age Pension eligibility up front. You can do this easily here using the Retirement Essentials free Age Pension Assessment Calculator. Then you will know if you will qualify, just miss out, or be self-funded for a long while, in which case Centrelink rulings are unlikely to be of immediate concern.
What is a gift?
A gift of money is a transfer that you are not expecting to be repaid. Centrelink rules allow you to gift up to $10,000 per year, up to a maximum of $30,000 within five years.
The limits are the same for singles and couples. The most you can gift without it affecting Age Pension payments is:
- $10,000 in one financial year, or
- $30,000 over five financial years (but this can’t include more than $10,000 in any year).
Amounts you gift in excess of these limits will count in your assets test. This money will also
have deemed income applied and this will be included in your income test for five years after the date of the gift.
How does this differ from a loan?
Centrelink requires certain evidence to define your loan as a loan. This includes either a formal contract, or an email exchange, stating terms and conditions such as:
- The repayment amount and schedule,
- length of the loan and
- any interest that will be paid.
You also need to supply evidence of the current loan balance when you apply for the Age Pension. As loans are financial assets, income is deemed from the current balance and the onus is on you to update Centrelink as the balance reduces over time. If repayments are not made or you do not update Centrelink, then the full balance is deemed under the asset rules on an ongoing basis.
If you change the status of a loan – say you loan money and then forgive the repayments, then this becomes a gift and the gifting rules apply from when the repayments are forgiven.
Timing your gifts – the five-year rule
Last year we shared the story of Sam, who wanted to give some of his money to his son. Sam was unclear if he was gifting or making a loan as he didn’t expect his son to repay the funds. In the eyes of Centrelink, that makes it a gift! So he needed to be aware of the rules in order to decide the most advantageous way to schedule this transfer. He had just turned 61 which means that he will become eligible for the Age Pension when he turns 67. He wanted to give his son $100,000 sometime in the future, to help him with home renovations.
Because Sam gifted the money more than five years before he was old enough to apply for the Age Pension, he will not be affected by the gifting provisions.
Had Sam waited until he was applying for the Age Pension to gift the money, he would have been affected by lower Age Pension each year across a five year period. Read more about the way he timed this gift here.
Will helping the kids out threaten your Age Pension?
Here are three family scenarios where understanding the finer points of gifts and loans can be really helpful. Our thanks to Guru Steven who heads up the Retirement Essentials Customer Services Team.
Don’s wife is in a nursing home.
Q. My wife is 88 and in a nursing home living separately to me. I’m 89 and am in a retirement village. My retirement unit is fully paid and my wife’s accommodation deposit (RAD) is 75% paid. We are both getting individual full Age Pensions (as she only has assets of $110,000 and I have assets of $170,000, well under the $451,500 joint asset limit for the full Age Pension.
We both want to gift our grandson $30,000 ($60,000 in total) for the deposit to purchase a unit for himself to live in. We think we can afford this, but will it affect the full Age Pensions that we currently get?
Says Steven Sadler:
Hi Don, sorry to hear that you and your wife are separated due to illness. Regarding gifting the proposed amount to your grandson, yes you can do this. The penalty for gifting too much money is that although the money is no longer in your possession Centrelink still assess it as if it were, because you didn’t have to gift it. In your situation, though, you are already under the minimum asset threshold so there will be no impact to your Age Pension. You should still notify Centrelink of the gifting and provide bank statements to show the transfers, so that Centrelink can update their records accordingly.
Gerry wants to buy a home
What happens if the mother joins in the purchase of a house in order for her to live in together with her son? Is this a gift or a loan?
Says Steven Sadler:
Hi Gerry, good question! In general this transaction would not be counted as gifting because in exchange for the money, the mother is receiving the right to live in the house. Gifting is when you give away an asset for either nothing or less than its market value. Centrelink refers to your scenario as ‘Granny Flat Interest’ – it’s actually an agreement for accommodation -and you can read more about it here.
Fiona and her husband have a blended family
I am 60, my husband is 64, we have been married five years and both have children from previous marriages. I would like to gift my children some cash five years before I retire.
How will this affect my husband’s Centrelink claim in three years’ time? Our plan is to pay down the mortgage and have total assets at the single person limit (excluding my super balance).
Says Steven Sadler:
Hi Fiona, great to hear you are trying to plan ahead! When your husband applies for the Age Pension, he will be assessed under the couple’s thresholds/Age Pension rate because it is based on his relationship status, not whether you are both applying or only one of you is. Therefore if you were to gift money now, in three years’ time your husband will need to declare it to Centrelink. That said, it will only affect his Age Pension for two years.
As you are trying to plan ahead Fiona, you may benefit from having a Retirement Advice Consultation with one of Retirement Essentials financial advisers. They may be able to help you better understand your needs and goals in retirement and some of the actions you can consider to help you achieve them, while maximising your income.
Further information and Q&A on gifting can be found in our article, When is a loan a gift?
What about you? Do you have any questions on gifting, loans and entitlements? We’d love to hear from you if you do.