"Hi, I’m Gerry, in my early 50s and aiming to retire around 65. I’m trying to figure out how the Age Pension might influence the timing of my retirement and my planning for retirement funding. Can you explain how the Age Pension works and what I’d need to qualify?"
-Gerry from Eagle Farm in QLD
Top answer provided by:
Declan Thomas
Hi Gerry,
Good on you for taking control of your retirement outcomes, too many leave it too late.
There are lots of calculators that will advise your age pension entitlement, a simple google search and you will find a few.
I have included some factual information below so you understand more about the eligibility and means testing calculations for Age Penson.
I thought it would be better to give some actual advice on how to maximise your age pension benefits.
Here are my 5 top LEGAL tips to get more of that sweet Age Pension.
1. Gifting:
You can make gifts to family members or friends to reduce your assets and income and therefore increase your Age Pension entitlements. However, there are limits on the amount you can gift each year without incurring a gifting penalty. The gifting limits are:
A. $10,000 in one financial year
B. $30,000 over 5 financial years - this can’t include more than $10,000 in a single financial year.
2. Use your age gap to your advantage:
Should there be a difference in age between you and your spouse, you can benefit from this by being crafty about how you allocate your money within superannuation and pension accounts to improve your age pension entitlement. The bigger the age gap the better the potential for benefit from this strategy.
A. Superannuation for a member of a couple under age 67 is an exempt asset from means testing for the Age Pension.
B. You need to be careful of access and contribution rules around super, which can be a minefield and really cause some issues if you get this wrong.
C. We recently helped a couple with a 3 year age gap improve their age pension benefit over 3 years by $68,000 in total. Not bad for advice that cost $3,300.
3. Funeral Bonds:
You can purchase a funeral bond product (max $14,000 per person) and use the proceeds from this investment to pay for your funeral expenses.
A. Funeral bonds are an exempt asset for the Age Pension means testing, therefore boosting your Age Pension entitlements.
B. The bond will also benefits from investment returns, so its value can grow over time.
4. Lifetime Annuities:
A lifetime annuity is a financial product that pays you a fixed income for the rest of your life, no matter how long that is.
A. You receive means testing concessions on both the income generated from the annuity as well as the capital invested into the annuity, providing opportunities to significantly increase your Age Pension Income.
B. This comes at the cost of estate outcomes, so consideration needs to be given to your risk tolerance, health situation and estate needs.
5. Home Renovations:
You can make home renovations that are designed to upgrade your primary place of residence.
A. The money tipped into these renovations won't count towards your Age Pension means testing as the Family Home is an exempt asset from the Age Pension means tests.
It's important to keep in mind that these strategies have many ramifications once implemented and there are many risks associated with each strategy that aren't discussed here. Many of these decisions, once actioned, cannot be undone. Your individual circumstances will dictate whether you can actually get any benefit from implementing them.
You should always consult with a financial advisor and understand the risks, benefits and how it could help you achieve your goals before making any decisions on if these strategies are right for you.
Age Pension Rates and Asset and Income Eligibility Tests - Australian Residents
The Australian Government's Age Pension is designed to provide income support for eligible older Australians and is indexed twice each year, on 20 March and 20 September, to reflect changes in pensioner cost of living and wage increases. Eligibility is assessed on the basis of your age, residency status and an assessment of your income and assets.
Age Pension Rates from September 20, 2024 to March 19, 2025
Qualifying for an Aged Pension
To qualify for the Age Pensions, you must:
- Be an Australian resident and reside in Australia on the day that you lodge your claim (you also need to meet the 10-year qualifying Australian residence requirements), and
- Be of eligible age - with the eligibility age gradually increasing to 67 for both men and women, as per the table below:
Income and Asset Tests
Your age pension entitlement is calculated by reference to how much other income you receive (the "Income Test") and how much your assets are worth (the "Assets Test"). You can have a certain amount of income and assets and still receive the maximum rate Age Pension; but if your income or assets exceed certain thresholds then your Age Pension reduces on a sliding scale. Note that the Test that results in the lowest payment rate will apply.
Age Pension Income Test
Most types of income ("assessable income") are taken into account when determining your Age Pension entitlement, including:
- Financial investments (including money in super funds if you have reached age pension age);
- Employment income (if you are still working); including amounts salary sacrificed into super
- Income from sole trader or partnership businesses
- Distributions or dividends from private trusts and private companies
- Real estate income, including income from rental properties, boarders or lodgers
- Income from outside Australia, including non-Australian pensions
Some financial investments (eg. term deposits, shares, managed funds) are "deemed" to earn a certain rate of income, regardless of what they are actually earning. This is referred to as "deeming" and the rate has been very topical recently, given historically low interest rates).
Current Annual deeming thresholds and rates - effective from 1 July, 2024 - are as follows:
The Government announced in the 2024 Budget that social security deeming rates will be frozen at their current levels for a further 12 months until 30 June 2025. Without this freeze deeming rates could have been expected to increase quite significantly, as they broadly follow the cash rate, and led to a number of individuals seeing reduced pension payments.
Income Test Thresholds (Residents) effective September 20, 2024 - Fortnightly Income figures
Short example of how this works: The pension is reduced by 50c for every dollar of income per fortnight over $212 for single pensioners ($5,512 pa) and 25c for every dollar over $372 for couples ($9,672 pa). So, a single pensioner with an income of $1,000 per fortnight would be limited under the income test to the single rate pension of $1,144.40 less (($1,000 - $212) x 50%)) = ($1,144.40 - $394) = $750.40 per fortnight.
Age Pension Assets Test
- Real estate assets (excluding your principal home – unless it is used to conduct a business or it is on more than 2 hectares of land)
- Life interests (eg. where you transfer an asset to another person but retain an interest in the asset)
- Retirement village entry contributions – if you pay less than the threshold ( $242,000 as at 1/7/2023), you are considered to be a non-homeowner and your entry contribution is included in the assets test. The threshold is called the "extra allowable amount" (EAA) and is the difference between the asset limit for home owners and non-home owners
- Financial investments
- Superannuation investments (super owned by you or your partner is included in your asset test if the owner is over age pension age)
- Income streams
- Business assets
- Funeral investments (although there are a range of different funeral investments that may be either partially or fully exempt from the assets test)
Asset Test Thresholds effective September 20, 2024
Short example of how this works: The age pension is reduced by $3 per fortnight for every $1,000 above the requisite asset threshold. So, for a single, home owning pensioner with $500,000 in assets the pension is reduced by ((500,000 - $314,000)/1000) x $3 = $558.00 = Pension of ($1,144.40 - $558.00) = $586.40 per fortnight.
Determining whether you are entitled to a pension and to what amount can be complicated, and the above summary and scenarios are a useful guide but may not be all inclusive.
The commentary above should be read in conjunction with the information on The Australian Government's Department of Human Services website.
While the Adviser Ratings Website facilitates the question and answer functionality, all such communications are between users and authorised financial advisers, of which Adviser Ratings has no affiliation. Adviser Ratings is not the advice provider and does not provide financial product advice and only provides information that is general in nature.
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