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
Action | Centrelink’s rule | Need to know |
Receive and gift | Any amount above the gifting limits will be assessable for a period of time | Check gifting rules before proceeding if you are likely to receive Age Pension benefits |
Pay down mortgage | These funds are not assessable as they are invested in the family home which is an exempt asset. Find out more | There 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 test | Reviewing your entire super strategy makes sense before you commit |
Spend on holiday or consumables | As this money is spent, then it is not assessable | It’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.
What does Centrelink need to know?
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?
How could Linda contribute to super if she is receiving a full Age Pension. My understanding is that once retired on a full Age Pension you can no longer contribute to Super?
Hi Jill, receiving the Age Pension (whether in full or only part) does not instantly preclude you from contributing to super. As always there are rules around how much can be contributed and under what situations but receiving the Age Pension is not one of the factors that needs to be considered.
I am 70 and work part time. My husband and I receive a part pension which is reduced each fortnight as the $’s I earn exceed the allowable amount.
We do not understand why the income from Centrelink is added to my employer income in my tax return and the combined total is my taxable income which I then have to pay additional tax on.
It seems to us that we are being penalised again. The pension has already been reduced because of my earnings and then the amount we receive from Centrelink is taxed.
For the last 2 tax returns I have received a tax bill to pay. Continuing working no longer makes sense financially. I might earn some $ but then am penalised with additional tax at tax time.
The pension was not always included as income for tax purposes so why the last 2 years?
Hi Sonia, if the Age Pension is your only source of income then you do not have to pay tax on it but if you earn other income also then yes you do need to pay tax on the pension.
Only paying down the mortgage on your home has no effect. Paying off the mortgage secured against an investment property changes its net value and will increase your total assessable assets
I as a beneficiary of my late mother’s estate received a benefit of 300k. I have spent 70k of this with balance in a savings a/c.
I am not certain if this asset has been disclosed to Centrelink.
Hi Trevor, I’d recommend calling Centrelink on 132 300 to clarify the income/asset values they have on file for you. If they are not aware of the increase from the inheritance then you may have to pay back some pension so better to get on top of it sooner rather then later.
I am on a full pension. I stand to inherit about $80,000 I have no other money and a $20,000 debt what is the best thing to do so I don’t lose my pension
Hi Susan, based on the figures you provided the inheritance will not impact your pension as you will still be under the allowed amount of assets.
I have enough money in Super to pay off my home now. Am 62 years old with many health issues. Is it better to retire, pay off house and live off disability pension or try to keep working, pay interest and contribute to super. Some days are just so hard, I can hardly get out of bed. M6 expenses are about $10,000 a year without house payments.
Hi Michelle, this is a great question and a big decision many people seek to understand the long term pros/cons so they can do what is best for them. You should definitely look at booking a consultation with our specialists (HERE) as the session will go over what both options will look like for you in the long run so you can decide which way is better for you.
Hi Steven, can you upsize with inheritance? Sell existing property and buy something more expensive. Will that still affect the pension?
Hi Anna, you can do that if you wish. Centrelink will not penalise you for for spending more on the new home then you made from selling the old one.
What if you inherit land overseas and you have no real idea of its value and whether it might be saleable? For example, some possible farming land outside a village that has been in the family a long time unoccupied and unused.
Hi Aysen, good question as not as common a situation. You would still need to declare the property as an asset and with at least an estimate of the value. You don’t have to provide a formal valuation certificate or anything so we recommend customers jump online and search real estate sites in that country to see if they can get an estimate of the value.
I am expecting to receive inheritance funds before I reach pension age but after my husband reaches pension age. Does my husband need to disclose my inheritance funds to Centrelink?
I will be disclosing the funds to Centrelink, regardless, as I have a Low Income Healthcare Card and my husband is included on the card.
Hi Peta, great question as it is important you get this right. Your assets are assessable for your husband’s pension so yes you should notify Centrelink when you receive the funds so they can see if a recalculation is necessary.
I think there is a glaring failure to mention what helens asset values( money in super, money in a retirement inv
come plan, money in her bank account etc) were before she added the extra $200,000 inheritance,to her assets, as $200,000 in ac
term deposit, is her only asset, how would her age pension be reduced.
Hi Peter, the goal of the article was to clarify the options you have when receiving an inheritance so we didn’t think it necessary to go into the specific figures. Thank you for your feedback.
Hi if I buy an investment property for my brother to rent from me will this affect my carer pension will it be deemed as income. I’ll have a mortgage on the investment property of $150,000 I just can’t live with him anymore.
Hi Leonie, yes in this situation you have proposed the rent would be assessed as income.
Thank you for all these useful tips. My question is – what is the actual “allowed amount of assets”?
Hi Hanna, glad to hear you found the article helpful! The amount of assets you are allowed depends on whether or not you have a partner and also whether or not you are considered a home-owner. We have a page on our website HERE which goes over the thresholds in detail.
I have $480k in super and a $150k mortgage. As the difference between what interest I am paying on mortgage 6.1% versus interest earned on super was quite different I have not paid off mortgage. I’m 66 almost and no longer working since 2021 but drawing income from my super. Should I pay off mortgage or not before the 66 1/2 age where I can start the pension application. Im with Australian Super balanced fund. Hubby not working or on pension and is 71. He has $17k in super.
Hi Kerrie, thanks for reaching out for further clarity! One of our consultations is designed to specifically address this scenario with you so you can make the best decision for you and your husband. To make a booking, CLICK HERE.