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When applying for the Age Pension an applicant must meet certain eligibility criteria;

    • Residency Test
    • Income Test Limits
    • Assets Test Limits

Whether the applicant is single or a couple is also taken into account.  Couples have higher limits for the Income and Assets tests.

While everyone’s circumstances are different, Senior Australians are more likely to find their Age Pension entitlements are impacted by the asset test than the income test. i.e their assets are more likely to exceed the thresholds than their income. 

What assets are counted

Centrelink looks at the type and value of all assets an applicant owns in and outside of Australia.  There are some assets they don’t assess which are referred to as exempt assets and these include:

    • principal home and surrounding land up to 2 hectares on the same title
    • principal home, if the applicant/s vacate it for up to 12 months or 2 years if entering a care situation
    • any property or money left to applicant/s in an estate, which the applicant/s can’t get for up to 12 months
    • accommodation bonds paid on entry to a residential aged care facility

For all other assets Centrelink considers the value of what the applicant/s gets if the asset was sold at market value. They deduct any debt that is secured by the assessable asset, from its market value. One area where people get caught out is with the principal residence. Any mortgage debt against the principal residence cannot be offset against an investment property, even if it was used to acquire that property.   

Financial investments (including partners if a couple)

Centrelink will assess financial investments under both the assets and income tests.  Financial assets include:

    • Superannuation investments (if your partner is under age pension age, their super is not counted)
    • Income streams purchased from superannuation money or other money
    • Business assets, Trusts
    • Funeral investments (note: some may be partially or fully exempt)
    • Assets that you have given away to children etc (referred to as gifting)
    • Special Disability Trust
    • Other assets (cars, boats, household items etc)

Can assets be reduced without it impacting on age pension eligibility

If applicants give away income or assets, they may still count towards the income and assets tests. This also applies if they sell them for less than they’re worth.  However there are a couple of options that can be considered:

Gift some of the assets (within the Centrelink limits)

The allowable disposal amount (Gift) is the same for both a single person or a couple. It’s either:

    • $10,000 in 1 financial year (total)
    • $30,000 over 5 financial years (total) – this can’t include more than $10,000 in a single financial year.

Any gifts made in the previous 5 years do apply for the age pension assessment in income and assets tests if they have exceeded the above limits.

Use some of the financial assets to make renovations around the principal home

The principal home may not have had any updates to its kitchen, bathroom, paint, carpets etc.  Some money could be used to do so which would reduce assets.  

However the applicant will lose out on any future earnings from the super/cash/shares that are used to pay for the renovations.

Reducing or paying off the mortgage on the principal home

It is generally recognised that it is better to pay off all debt at retirement.  An applicant may want to consider withdrawing funds from their superannuation or bank account to pay off all (or some of) the current mortgage. 

Benefits of paying off/down own home mortgage:

    • removes the mortgage payments and the risk of payment increases due to interest rate rises
    • potentially increases the age pension payment due to reduction of asset value (if the applicant is a part pensioner)

Issues to be aware of:

    • if there is not very long left on the mortgage it may not be worth paying off the mortgage 
    • there may be penalties applied by the mortgage provider if the loan is repaid early
    • losing out on the future earnings of the super/cash balance that is used to pay down / off the mortgage

Reviewing the mortgage structure with the lender if it’s for an investment property

Centrelink deduct any debt owed that the assessable asset is security for.  If the applicant/s principal home is the security for the loan used to purchase the investment property then this debt is not used to offset the assessable asset value of the investment property.  This is because the principal home is not an assessable asset for Centrelink purposes.  It may be worth discussing with the lender the options or opportunities available to structure the loan against the investment property.

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.