Means testing just got simpler:
Here’s how it works
The application of the Age Pension means test to your income or assets means the difference between a higher or lower pension payment – or whether you receive one at all. We know the very term ‘taper rates’ is off-putting, so today we explain how your entitlements may change according to these very important rates.
Two-part means test.
There are two components to means testing. These are:
- The ‘free’ area, which means that people can have certain levels of income or assets without affecting their Age Pension rate.
- The ‘taper’ rate, which progressively reduces the Age Pension payments for people with higher levels of assessable means. The taper rate is usually associated with the assets test but there is also a tapering associated with the income test.
Let’s consider each of these aspects of eligibility. There is also a link to the current (20 March 2023) thresholds at the end of this article.
Income test free area
The maximum amount of assessable income a person can receive before their payment is reduced. A person with assessable income of less than or equal to the free area amount will be eligible for the maximum rate of the payment under the income test.
Income test cut-off value
The maximum amount of assessable income a person can receive before they become ineligible for the payment. A person with assessable income above the cut-off value will be ineligible for the payment under the income test.
Income test taper rate
Your pension payment will be reduced by $0.50 for every $1 that your income exceeds the test free area (minimum threshold). This does not include the Work Bonus.
Assets test free area
The maximum amount of assessable assets you may have before your pension entitlement is reduced.
Assets test cut-off value
The maximum amount of assessable assets a person can hold before they are ineligible for the payment. A person who holds assessable assets above the cut-off value will be ineligible for the payment under the assets test.
Assets test taper rate
The amount a person’s payment is reduced due to holding assessable assets above the assets test free area. Since 2017, the Age Pension taper rate reduces payments by $3 a fortnight for every $1,000 of assets above the assets test free area.
These are the rules, but it’s far easier to see how they work in practice.
How the taper rate (assets) reduces Eloise’s payments
Eloise is a 69 year-old single homeowner.
She earns no wages or salary, and her income which is deemed on assets of $309,500 is far below the income threshold.
So her Age Pension entitlement is assessed on the basis of her assets.
The full Age Pension assets threshold is $280,000 for single homeowners.
Because Eloise is $29,500 over the threshold, a taper rate of $3 per fortnight, per $1000 in excess of the threshold, means that her pension will be reduced by $3 x 29.5, or $88.50 per fortnight ($2301 per annum).
How the taper rate (income) reduces Sue and Ian’s payments
Sue and Ian are both 70 years old and although they no longer work, they do still each receive income from their United Kingdom pensions.
Their combined assets are under the threshold as home-owners, so their Age Pension entitlement is assessed based on their income.
The maximum they can earn as a couple each year before their pension is reduced is $8,736 but their United Kingdom pensions combine for a total of AUD $80,000
This means that a taper rate of 50c per $1 will be applied to the $71,264 in excess of the threshold resulting in a reduction to Fred and Wilma’s pension of $35,632 per annum ($1,370 per fortnight). In other words, they will receive a combined pension payment of $234 per fortnight or $6,084 per annum
As always, there can be exceptions to the rules. It is worth checking exempt assets if you have annuities or lifetime income streams (they can be partially exempt) as well as a main residence held after a move to a care facility.
Here are the current income and assets thresholds
If you would like more support to better understand how the taper rate works in your particular situation we are happy to offer tailored consultations for out experienced advisers to step you through the detail
Or you can check your current entitlements by clicking below.