For many retirees who were unable to enjoy the wonderful retirement savings vehicle that superannuation now affords, the age pension is a major source of income for them. A bonus of part-pension eligibility is the prized ‘Pensioner Concession Card’ (PCC), even if the actual benefit is only minuscule.

Eligibility for the age pension is tested under both an ‘income test’ and an ‘assets test’ and the test that produces the lower benefit is the one that is used. Accordingly, the following traps need to be avoided.

Additional income

If you are assessed under the assets test then you can potentially earn additional income without having your benefit impacted. For instance, a home owning couple with $800,000 in assessable assets will receive an age pension benefit of $137 each per fortnight under the assets test. Under this scenario, their assessable income can be as high as $68,000 before their benefit reduces.

This potentially allows pensioners to undertake some form of work, if they are inclined, without having their age pension or PCC entitlement affected.

Valuing assets

The principal residence is not an assessable asset, however, furniture, vehicles, boats and caravans are. Many pensioners fall into the trap of valuing these assets at replacement value which could be costly as every $10,000 of excess assets reduces the age pension by $780 a year. To avoid the trap, furniture, vehicles, boats and caravans should be valued at what you expect to get from them in a garage sale, not what it will cost you to replace them.

Don’t spend just to get or increase the pension

There is absolutely nothing wrong with spending money on a holiday, renovating the home or enjoying a better quality of life. $100,000 worth of family home renovations increase your age pension by $7,800 per year, however, it will take almost 13 years of the increased pension to get that $100,000 back, not to mention the forgone return on that money. The benefits of renovating the home or travelling may be compelling, however, the main thing is to not spend money with the sole purpose of getting a higher age pension benefit.

Revaluations

Each year on 20 March and 20 September, Centrelink updates the value of market-linked investments such as shares and managed funds. Notwithstanding this automatic update, at any time the asset value can be updated. This means the rules favour pensioners because if the value of your investments rises, you can wait for Centrelink to run the automatic update in March and September. Conversely, if the value of your investments decline, you should notify Centrelink immediately which may lead to receiving a greater benefit.

Gifting

A pensioner can reduce their assessable assets by giving money away, however, it is important to seek advice. The rules allow gifts of $10,000 in a financial year with a maximum of $30,000 over five years. A pensioner could reduce their assets by $20,000 in a matter of days by giving away $10,000 just prior to 30 June and then another $10,000 on 1 July or thereafter.

Superannuation

Where a member of a couple has not yet reached age pension age, it can be beneficial to hold as much super in the younger person’s name in ‘accumulation’ mode as it will be exempt from Centrelink assessment. However, the moment that person is age pension age or a pension is commenced from that accumulation account, Centrelink will assess that asset.

Mortgaged assets

A common trap arises where a loan is used to purchase an investment property and the loan is secured by a mortgage against the pensioner’s residence. A debt against an investment asset is only deducted from the asset value if the mortgage is held against the investment asset. If the mortgage is secured against another asset, the full value of the investment asset will be assessed. The effect could be a complete disaster.

Bequests

Another trap can arise due to the significant difference between the asset cut-off point for a single person and that for a couple. At 20 September 2021, the single home owner asset cut-off point was $593,000, whereas for a couple it was $891,500. By leaving assets to each other, the surviving partner may lose entitlement to the age pension, hardly helping the grief being experienced at that time.

Jointly owned assets with adult children

A decision without proper planning can have consequences in the future. A scenario many of you have no doubt faced, especially in recent times, is helping a child to enter the residential property market for the first time. It might seem like a great idea at the time for a couple aged 55 to take on a 50% share of a house worth $400,000 to enable their child to borrow against their portion of ownership, but how might this look when you get to age pension age and you still own 50% of that property?

The value of the property could appreciate substantially over the next 12 years i.e; when the couple become eligible for the age pension, to the point that it results in their assets being above the asset test cut-off point.

If their 50% interest is then transferred to their child, not only will there be potential Capital Gains Tax implications but Centrelink will treat that ’gift’ as a deprived asset for the next 5 years, further adding to age pension eligibility woes.

In this instance, it would be far more appropriate for the couple to become a guarantor for their child, possibly putting up their own home as part security. The rules of the age pension are complex, sourcing appropriate advice could pay dividends!

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.