could inheritance lose my pension

It depends on how you use it

Linda and Helen are sisters in their early 70s. They both live in their own separate homes and receive the full Age Pension entitlement. Neither has a mortgage. Their uncle died recently and they were both surprised to receive $200,000 each.

Linda used her inheritance to renovate, installing a stair lift and generally ‘age-proofing’ her home. The balance after renovations was $40,000 so she contributed this to her super. Helen didn’t see the need for such renovations in her home, preferring instead to put the full amount into a 12-month term deposit account so that she can use the extra interest earnings to top up the somewhat modest Age Pension entitlement of $29,754. She was shocked to be informed by Centrelink that she is no longer entitled to the full fortnightly benefit and will now receive a part-Age Pension instead.

Helen was very stressed when she contacted Retirement Essentials, still struggling to understand how the same inheritance amount could cause her loss of full Age Pension entitlements while her sister, as she said, ‘ got off scott free’. ‘How can this same amount be treated so differently’, she asked?

Retirement Essentials gets asked questions about expected (and unexpected) bequests frequently. The common theme is ‘How will this extra money affect my pension’. Somewhat annoyingly, there is just one answer; ‘It depends!’

This may be less than satisfactory to those who want quick answers and absolute certainty. But it highlights a common thread that runs through most of the different aspects of retirement income. No two situations are entirely alike. There are many different rules and it comes back to how and when you use windfall gains such as an inheritance as to how your income could be affected.

So back to Helen. As she has only committed her funds for a year, she has time to plan what she will do with this money if regaining her full Age Pension is her primary goal. In the meantime she booked a Retirement Income Forecast consultation. She was surprised to see that between the annual growth in her super savings and the interest earned by the term deposit, she was not actually worse off on the part Age Pension. (The earnings on these assets continue to be deemed at low rate, compared to actual market performance.)

As in many other cases, Helen could see that spending for the sake of it in order to reduce assets and get a higher pension is not necessarily the wisest course.

Underlying this situation is the critical point of whether a bequest will add to your assessable assets or not. The following table shows some of the ways that people might use inheritances and the way Services Australia treats the funds

ActionCentrelink’s ruleNeed to know
Receive and giftAny amount above the gifting limits will be assessable for a period of timeCheck gifting rules before proceeding if you are likely to receive Age Pension benefits
Pay down mortgageThese funds are not assessable as they are invested in the family home which is an exempt asset.  Find out moreThere is an added  benefit of interest saved. 
Contribute to super (assuming no age restrictions)This money adds to the total of your assessable assets, it is also deemed for the income testReviewing your entire super strategy makes sense before you commit 
Spend on holiday or consumablesAs this money is spent, then it is not assessableIt’s wise to view your full retirement income funding plans before spending funds you might need for future expenses, including aged care

Of course this list is only a summary of the main ways people might use an inheritance and cannot address every situation, amount or option.

All options have pros and cons – most of which can be explored in a retirement income forecasting consultation, to see what this does to your long term income outlook. Depending upon where and how you use or invest this money, the returns will be different and so will the ramifications on entitlements and taxation.

There is however, one non-negotiable – and that’s informing Centrelink.

If you are one of the majority of Australians receiving  a full or part-Age Pension, you must inform Centrelink of this change in your assets. Assuming this inheritance increases the value of your assets, your revised benefits will commence immediately.

If you are not currently receiving an Age Pension, it’s still worth exploring how this extra money can be most usefully managed in case it could affect future entitlements. Remember, if you gift it, Centrelink views gifts made during the previous five years as part of your total assets which are both counted under the assets test and deemed to earn income.  We cover keeping Centrelink informed here.  

And one last thing

We have explained the way the younger spouse rule works many times. Should this be your situation, extra money which is transferred to a younger spouse’s accumulation account will not be counted as joint assets for the sake of your own possible Age Pension entitlement – if they are aged under 67. This is explained more fully here

Have you received a windfall gain?

If so, how did you decide the best way to use this money?