Jenny and Daniel contacted us with a dilemma recently. They had received a windfall gain due to an unexpected inheritance. Often inheriting money also means a time of great sadness, but in this case they did not actually know the great uncle who had remembered Jenny in his will. They were now wondering where and how to use these funds in a way that would not result in a loss of Jenny’s Age Pension entitlements. Here’s how Retirement Essentials adviser Nicole Bell was able to step Jenny and Daniel through their options and the way each one would affect their overall financial situation.
Jenny and Daniel’s current situation
Jenny is 67, Daniel is 64 and they are both fully retired. Their financial situation is as follows:
- They are homeowners with a $99,000 mortgage.
- Their combined current assets are $520,000.
- Jenny is currently receiving Age Pension entitlements of around $735 per fortnight ($19,110 per annum) which is around $105 per fortnight (or $2730 per annum) less than half of the full Age Pension for a couple.
- Daniel is not yet eligible for an Age Pension.
- Their combined assets of $520,000 exceed the minimum threshold for the Age Pension which is why Jenny only receives a part Age Pension. This means that any increase in assets will have an impact upon their (i.e. Jenny’s) entitlements.
- Jenny has inherited $120,000 from her great uncle in the UK.
Will we lose our pension?
They approached Retirement Essentials to discuss the various ways of using this money because they were very concerned about losing a substantial part of their income (the Age Pension entitlement of $19,110 per annum) if their asset status changed too much. They were open to further investing this money in super, investing in the stock market, paying down their mortgage or spending it, perhaps on renovations or a trip to England where Jenny was born. Nicole spent some time with them discussing the effect of each different use for the money, and here’s a summary of the pros and cons of each different strategy.
| Options | Effect on current Age Pension entitlement | Effect on overall situation | Other comments |
| Put into Jenny’s Super | Reduction of $180 per fortnight in Age Pension entitlements | Will need to draw greater amounts from super to meet cash flow shortfall due to Age Pension decrease | |
| Put into Daniel’s Super | No change – Daniel’s super is exempt for another three years if retained in accumulation phase | Will need to be retained in accumulation, subject to earning tax so need to weigh up the pros v. cons for tax, Age Pension, and cash flow implications. | If Jenny and Daniel do put these funds into Daniel’s account and draw more from Jenny’s super, this might result in Daniel ending up with significantly higher balance. So it’s important to ensure estate planning is considered and beneficiary nominations are valid. |
| Invest in Shares | Reduction of $180 per fortnight in Age Pension entitlements | Cash flow coming from shares might make up some of the impact, but they would need a net income return of 3.9% per annum to be in equivalent cash flow position initially, and greater once Daniel is 67. | Will likely require a lot more active involvement in managing the investments compared with placing it in a retail or industry super fund. Taxable at a personal level, this might be good, bad, or neutral depending upon tax position |
| Pay off mortgage | Only the remaining $21,000 (after the $99,000 is repaid) is assessable, reducing the Age Pension by $32 per fortnight (assuming $21,000 leftover is moved to cash) | Reduces spending costs as no longer need to meet mortgage payments, and minimises impact on Age Pension entitlements | Another consideration here would be missed ‘opportunity costs’ from investment compared with interest rate on home loan. But given the Age Pension benefits in addition to these calculations then the benefits of mortgage repayment generally significantly outweigh not repaying it. |
| Spend money on renovations | Might have a short term impact until all funds are spent, but no Age Pension impact once inheritance monies have been spent. | They have utilised their funds to increase the capital value of their home, but without an impact on cash flow | Need to look at whether they still have the resources they need for a comfortable retirement if they spend this money, given they still have a mortgage to service. |
| Take an extended break in Europe | This is a legitimate expense and the cost will decrease assets, so ultimately no Age Pension impact | No increase in assets, so there is no effect on Age Pension, so the overall impact of receiving the inheritance is negligible | Would be a wonderful memory and amazing adventure to have, however once again Jenny and Daniel will need to reflect on whether they will still have the resources they need to be comfortable through retirement |
There is no clear cut ‘right’ way to use this unexpected money. That said, there are useful ways to ensure that Jenny and Daniel have considered the ramifications as thoroughly as possible. Using the Retirement Forecaster calculator with Nicole is their next intention, so they can see how far their current super savings will stretch, when combined with current and future Age Pension entitlements as Daniel reaches 67. They are also interested in modelling some ‘best of both worlds’ options, such as using $30,000 for a shorter stay in Europe and maybe reducing their mortgage by about $80,000. The most important thing is for them to discuss and prioritise their joint preferences, making sure they are on the same page as to the best way to use Great Uncle Arthur’s generous bequest.
Nicole considered quite a few strategies for Jenny and Daniel when working with them. These include the younger spouse strategy and maximising entitlements to help Jenny and Daniel to structure their assets to minimise any inheritance impacts on their benefits. A Retirement Essentials tailored affordable consultation can also support your decision-making when the options are less than clear.
Do you have any concerns about unexpected financial gains?
We’d love to hear them.
This article is provided by Retirement Essentials Representative Number: 001260855. We are an authorised representative of SuperEd Pty Ltd ABN 88 118 480 907 AFSL #468859. This information is not intended as financial product advice, legal advice or taxation advice. It does not take into account your personal situation, goals or needs and you should assess your own financial situation, consider if the information is suitable for you and ensure you read the relevant Product Disclosure Statement (PDS) if you choose to make any changes to your financial situation. It is always advisable to consult a financial adviser before making financial decisions.
Your “put into Jenny’s Super” doesn’t make note that her compulsory 5% Super drawdown from the next July 1st would increase by $6000 (5% x $120k) so $230 per fortnight compared to her $180 per fortnight loss of pension.
Hello. My wife and I receive a part pension of $692 for me and $620 for my wife fortnightly. I have recently inherited $40,000. I have purchased gold. How will this effect our part pension
Hi Max. Your inheritance will affect your Age Pension entitlements. Your Age Pension reduces by $3 for every $1000 of assets above the threshold. So in your case this could be $120 a fortnight. The best way to check though will be on our free eligiblity calculator.
Would Jenny be able to put it into Super she is retired and 67 years old.
do uou have an article on downsizing and how to minimise the effect of the windfall upon a single part-pension with no mortgage?
Hi Jan, we do have some articles that address downsizing, such as this one, but none that specifically address the scenario you are talking about. In most cases, what ever funds are left after the purchase of the new property will increase assessable assets, and deemed income from investments. How that may impact you will depend on how much you already have and how much more you’ll have when you’re done. Obviously everyone’s situation is different. I would recommend a strategy consultation so we can discuss the implications of downsizing, including impacts on age pension, superannuation rules and longevity of your retirement wealth. Best wishes on finding your new home, Nicole.
I am soon to either retire or semi retire from a part-time position. My age is 74. I am Australian and live in Australia.
I own a property in Indonesia which is on the market to be sold. It’s estimated value is around A$1,400,000.
It has been on the market for a few years and I am not earning any income from it.
When I retire or reduce my working hours, am I eligible to receive an Australian pension either in part or full?
Hi Penny, thanks for reaching out. Based on the value of the above asset it is unlikely, you can refer to our website for eligibility rules which includes the asset thresholds that may apply to your situation. If you want to discuss retirement planning and how to best position the resources you have to provide for yourself in retirement I would recommend a strategy consultation. Best of luck, Nicole.
Why not consider putting the bulk off it against the mortgage if it has a redraw facility? Could be doing that already if it does.
Hi, I’m 63 and wanting to know what the Min and Max assets are and what is included please
Hi Allan and Lynete, there is a lot of detail available on our website if you want to explore, we even have a page that specifically addresses eligibility rules and details the current asset and income test thresholds. We also have a free age pension eligibility calculator, but if you want to discuss your particular situation in detail and where you sit within the rules I would recommend an Entitlement Consultation. Best wishes, Nicole.
Good Morning
Drawing down a small income pension from superannuation …does this affect the ability to receive the full age pension?
Hi Vanessa, thanks for the question. Your age pension eligibility is based on a range of different factors, and ultimately where you end up in terms of both income and asset test calculations. With superannuation, it is assessed the same regardless of whether it is in an ‘accumulation’ account or an ‘account-based pension’, as it is the deemed income that is assessable and not the actual income that you draw. However, it may have an impact if you are drawing a super pension from an account owned by someone under age pension age (i.e. younger spouse). Hope this helps, Nicole.
I only have $5000 in super, do I have a 5% compulsory draw on it, What if I don’t draw
Hi Greg, thanks for reaching out. There is no reason you can’t leave your super in an accumulation account forever, there is no requirement that you need to use the funds to set up an income stream. It is just that often at retirement many choose to set their super up with an income coming out for a range of reasons. There should be no change in your age pension assessment as the different types of super as generally assessed the same so you won’t be penalised from an age pension assessment perspective. Hope this helps, Nicole.
I have a property worth AUD 550,000 in another state and earn a rental of 550/- per week. Meanwhile, I am renting a property in NSW for 620/-. Based on the assumption that I have no other assets, including Super, will I be eligible for pensions. .
Thanks for your question. A number of things determine what asset thresholds may apply to your age pension calculation. I suggest you try our free age pension eligibility calculator on our website. Make sure that you select ‘no’ for homeowner. This is the best place to start to understand your potential eligibility. Best wishes, Nicole.
Thanks Nicole for our valuable feedback..
a) I tried age pension calculation as recommended by you. It gave an eligibility figure of $1401 per fortnight. It appears that aged pension is calculated based as a couple as both of us are in the bracket. However, I believe my spouse does not qualify as she has been a PR for only 6 years now and residing in Australia over the last 5 years. (I think you need to be PR for at least 10 years and lived here for 5 ears)
b) On that assumption, I re-attempted aged pension calculation for a single person (providing for my spouses income as well) and that gave me an eligibility of $756 per fortnight.
Which of the two options is applicable or relevant in my case? Or is there a third or better way to improve my/our eligibility.
Great question! In order to keep our calculator simple and user friendly, we do presume that you both meet the residency criteria however as you stated you do need to have been a citizen or permanent resident for at least 10 years so the second calculation you ran is more in line with the amount of pension you will be eligible for. Should you proceed with our service I can assure you the full application process is quite thorough and will cover all of this.
Just a thought to perhaps look at a balance between money into a “lifetime pension” and remainder in mortgage? Neither attracts assessment to my knowledge, so pension status remains the same and you’d increase your usable income (from the new lifetime pension).