Around 80% of retired Australians receive a part or full Age Pension which means most Aussies considering retirement will need to understand how the Age Pension rules operate. This article contains three case studies illustrating how the Age Pension works in practice. The case studies have been supplied by the Financial Information Service. SuperGuide would like to thank Financial Information Service officer, Regan Welburn for his assistance in updating and supplying the case studies.
Background: The Age Pension is the taxpayer-funded basic retirement income stream for those people who can’t fully support themselves, although in practical terms it also operates as a supplementary income source for Australians with other savings. The single rate Age Pension is set to at least 27.7 per cent of Male Total Average Weekly Earnings. An eligible individual must satisfy the Age Pension income test, and the Age Pension assets test to receive a full, or part, Age Pension. The amount of Age Pension will be based on the test that delivers the lowest amount on Age Pension entitlement. If an individual fails one of the tests, then he or she will not be eligible for the Age Pension.
You can check out case studies listed below by continuing to read this article.- Case Study 1: John, single, owns his home, $165,000 in savings and investments
- Case Study 2: Chris, single, owns his own home, earns $40,000 a year working, $300,000 in savings and investments
- Case Study 3: Frank and Janet: Frank is retired and Janet (age 60) works earning $42,000 a year, and Frank has $450,000 in super and $100,000 in non-super savings
Note: The case studies use Age Pension rates and income and assets tests current as at December 2011. SuperGuide has added some explanatory text to the case studies for ease of reading.
Case Study 1: John, single and $165,000 in savings
Single pensioner & completely retired. John owns his own home and has a budget of $500pw ($26,000pa). He has $165,000 in savings. If he leaves his savings in the bank and in managed investments outside the super environment, John is entitled to $693 a fortnight in Age Pension payments. If John starts an account-based pension with $150,000 of his savings, he is entitled to $748 a fortnight in Age Pension payments.
1.1 Assume John leaves his savings in the bank and in managed investments
Deemed income calculated on John’s financial assets…
| John:Financial Assets – Single | Totals | ||
| Bank Accounts | $15,000 | ||
| Managed Investments | $150,000 | ||
| Shares | $0 | ||
| Loans & Excess Gifts | |||
$165,000 | |||
| Deemed Income | |||
| $44,600 | $44,600 | 3.0% | $1,338 |
$120,400 | 4.5% | $5,418 | |
$165,000 | p.a. | $6,756 | |
John’s financial position is…
| John: Centrelink Assessment | |||
| Type | Detail | $ Asset | $ Income |
| Financial Assets | (deemed income) | $165,000 | $6,756 |
| Acct Based Pension | |||
| Employment Income | |||
| Real Estate | |||
| Other | |||
| Other | |||
| Home Contents | $5,000 | ||
| Motor Vehicles | $10,000 | ||
| Totals | $180,000 | $6,756 | |
| Work Bonus Red’n | must be APA & on pension | ||
Income p.a. | $6,756 | ||
Assets / Income p.f. | $180,000 | $260 | |
Applying the level of John’s income and assets…
| John: Rate – Single Pensioner (HO) | **You are paid the lower rate | Max: | $748.80 | |||
| New Rate (50% Taper) | Rate p.f. |
| Min: | $32.20 | ||
$180,000 | Assets: | $748.80 | Asset: | $186,750 | ||
$6,756 | Income (pa): | $693.88 | ** | nonTax: | $38.90 | |
Age Pension outcome: John’s approximate rate of payment per fortnight is $693
1.2 Assume John starts an account-based pension with $150,000
Assume that John commences an account based pension with $150,000 drawing 5% annual income.
Deemed income calculated on John’s financial assets…
| John: Financial Assets – Single | Totals | ||
| Bank Accounts | $15,000 | ||
| Managed Investments | |||
| Shares | $0 | ||
| Loans & Excess Gifts | |||
$15,000 | |||
| Deemed Income | |||
| $44,600 | $15,000 | 3.0% | $450 |
$0 | 4.5% | $0 | |
$15,000 | p.a. | $450 | |
John’s financial position is…
| John: Centrelink Assessment | |||
| Type | Detail | $ Asset | $ Income |
| Financial Assets | (deemed income) | $15,000 | $450 |
| Acct Based Pension | Gross annual income $7,500 | $150,000 | $0 |
| Employment Income | |||
| Real Estate | |||
| Other | |||
| Other | |||
| Home Contents | $5,000 | ||
| Motor Vehicles | $10,000 | ||
| Totals | $180,000 | $450 | |
| Work Bonus Red’n | must be APA & on pension | ||
Income p.a. | $450 | ||
Assets / Income p.f. | $180,000 | $17 | |
Applying the level of John’s income and assets…
| John: Rate – Single Pensioner (HO) | **You are paid the lower rate | Max: | $748.80 | |||
| New Rate (50% Taper) | Rate p.f. |
| Min: | $32.20 | ||
$180,000 | Assets: | $748.80 | Asset: | $186,750 | ||
$450 | Income (pa): | $748.80 | ** | nonTax: | $38.90 | |
Age Pension outcome: John’s approximate rate of payment per fortnight is $748
1.3 How an account-based pension can increase John’s Age Pension entitlements
The Deduction Amount (DA) of an account-based income stream is based on the ‘purchase price’ and the life expectation of the person at the time of purchase. The life expectation factor is divided into the purchase price to calculate the Deduction Amount. If there are subsequent commutations, the purchase price is reduced but the life expectation factor remains the same, thus reducing the Deduction Amount.
Each July, the annual income from the income stream has to be reset and is dependent on the person’s age and the account balance at that time. Using the July 2007 factors, for a person of age 65, the minimum PVF or percentage is 5% and the maximum PVF or percentage is 100%. Based on an account balance of $150,000, the level of income selected must be between $7,500 and $150,000 per year. Note: for the 2011/12 financial year, the minimum income level has been reduced to 75% of the calculated amount.
| John: Income Stream – Account Based Pension | Asset Value: $150,000 | Centrelink Assessment (p.a.) | ||
$7,500 | Gross Income (p.a.) | Gross Income: | $7,500 | |
$150,000 | Purchase Price (less commutations) | Deduction Amount: | $8,091 | |
18.54 | Relevant No (fixed) | Assessed Income: | $0 | |
Net Income Table (for scenario 1.1 – savings in bank and managed investments)
| John: Total Disposable Gross Income | |
| Pension | $18,040 |
| Income Stream | $0 |
| Account Based Pension | $0 |
| Interest | $0 |
| Total | $18,040 |
| Less tax | $0 |
| Other Deduction | |
| Net Income | $18,040 |
Net Income Table (for scenario 1.2 – starting an account-based pension with $150,000)
| John: Total Disposable Gross Income | |
| Pension | $19,468 |
| Income Stream | $0 |
| Account Based Pension | $7,500 |
| Interest | $0 |
| Total | $26,968 |
| Less tax | $0 |
| Other Deduction | |
| Net Income | $26,968 |
Note: By starting an account-based pension, John would receive an extra $1,428 in Age Pension each year. He would also no longer pay earnings tax (max 15%) within accumulation superannuation (approx $1,000).
Case Study 2: Chris, single, earning $40,000 a year, $300k in savings and super
Chris is a single pensioner earning $40,000 pa as an employee. He owns his own home and has a budget of $578pw ($30,000pa). If Chris leaves his super in accumulation phase, the deeming provisions will mean that Chris is not entitled to any Age Pension. If Chris starts an account-based pension his Age Pension entitlements will be $173 a fortnight.
2.1 Assume Chris leaves his super in accumulation phase
Deemed income calculated on Chris’s financial assets…
| Chris: Financial Assets – Single | Totals | ||
| Bank Accounts | $50,000 | ||
| Superannuation | $250,000 | ||
| Shares | $0 | ||
| Loans & Excess Gifts | |||
$300,000 | |||
| Deemed Income | |||
$44,600 | 3.0% | $1,338 | |
$255,400 | 4.5% | $11,493 | |
$300,000 | p.a. | $12,831 | |
Chris’s financial position is…
| Chris: Centrelink Assessment | |||
| Type | Detail | $ Asset | $ Income |
| Financial Assets | (deemed income) | $300,000 | $12,831 |
| Acct Based Pension | |||
| Employment Income | $40,000 | ||
| Real Estate | |||
| Other | |||
| Other | |||
| Home Contents | $5,000 | ||
| Motor Vehicles | $10,000 | ||
| Totals | $315,000 | $52,831 | |
| Work Bonus Red’n | must be APA & on pension | $6,500 | |
Income p.a. | $46,331 | ||
Assets / Income p.f. | $315,000 | $1,782 | |
Applying the level of Chris’s income and assets…
| Chris: Rate – Single Pensioner (HO) | **You are paid the lower rate | Max: | $748.80 | |||
| New Rate (50% Taper) | Rate p.f. |
| Min: | $32.20 | ||
$315,000 | Assets: | $556.42 | Asset: | $186,750 | ||
$46,331 | Income (pa): | $0.00 | ** | nonTax: | $38.90 | |
Age Pension outcome: Chris’s approximate rate of payment per fortnight is $0 (zero)
2.2 Assume Chris starts an account-based pension with $290,000
Assume that Chris contributes $41,000 from his bank accounts into his accumulation superannuation account. Chris then commences an account-based pension with $290,000 drawing 5% annual income. He leaves $1,000 in his accumulation super account so that his employer contributions can still be accepted.
Deemed income calculated on Chris’s financial assets…
| Chris: Financial Assets – Single | Totals | ||
| Bank Accounts | $9,000 | ||
| Superannuation | $1,000 | ||
| Shares | $0 | ||
| Loans & Excess Gifts | |||
$10,000 | |||
| Deemed Income | |||
| $44,600 | $10,000 | 3.0% | $300 |
$0 | 4.5% | $0 | |
$10,000 | p.a. | $300 | |
Chris’s financial position is…
| Chris: Centrelink Assessment | |||
| Type | Detail | $ Asset | $ Income |
| Financial Assets | (deemed income) | $10,000 | $300 |
| Acct Based Pension | Gross annual income $14,500 | $290,000 | $0 |
| Employment Income | $40,000 | ||
| Real Estate | |||
| Other | |||
| Other | |||
| Home Contents | $5,000 | ||
| Motor Vehicles | $10,000 | ||
| Totals | $315,000 | $40,300 | |
| Work Bonus Red’n | must be APA & on pension | $6,500 | |
Income p.a. | $33,800 | ||
Assets / Income p.f. | $315,000 | $1,300 | |
Applying the level of Chris’s income and assets…
| Chris: Rate – Single Pensioner (HO) | **You are paid the lower rate | Max: | $748.80 | |||
| New Rate (50% Taper) | Rate p.f. |
| Min: | $32.20 | ||
$315,000 | Assets: | $556.42 | Asset: | $186,750 | ||
$33,800 | Income (pa): | $173.80 | ** | nonTax: | $38.90 | |
Age Pension outcome: Chris’s approximate rate of payment per fortnight is $173.
2.3 How an account-based pension can increase Chris’s Age Pension entitlements and net income
The Deduction Amount (DA) of an account-based pension is based on the ‘purchase price’ and the life expectation of the person at the time of purchase. The life expectation factor is divided into the purchase price to calculate the Deduction Amount. If there are subsequent commutations the purchase price is reduced but the life expectation factor remains the same, thus reducing the Deduction Amount.
Each July the annual income from the income stream has to be reset and is dependent on the person’s age and the account balance at that time. Using the July 2007 factors, for a person of age 65, the minimum PVF or percentage is 5% and the maximum PVF or percentage is 100%. Based on an account balance of $290,000, the level of income selected must be between $14,500 and $290,000 per year. Note: for the 2011/12 financial year, the minimum income level has been reduced to 75% of the calculated amount.
| Chris: Income Stream – Account Based Pension | Asset Value: $290,000 | Centrelink Assessment (p.a.) | ||
$14,500 | Gross Income (p.a.) | Gross Income: | $14,500 | |
$290,000 | Purchase Price (less commutations) | Deduction Amount: | $15,642 | |
18.54 | Relevant No (fixed) | Assessed Income: | $0 | |
Net Income Table (Scenario 2.1 – leaving super in accumulation phase)
| Chris: Total Disposable Gross Income | |
| Pension | $0 |
| Employment Income | $40,000 |
| Account Based Pension | |
| Interest @ 5% ($40,000 invested) | $2,000 |
| Total | $42,000 |
| Less tax | $4,922 |
| Other Deduction | |
| Net Income | $37,078 |
For 2010/11, the Senior Australian Tax Offset for a single person with a taxable income of $42,000 is $838. For the 2011/12 financial year, with a gross income of $42,000, the tax and Medicare Levy payable is $4,922 leaving a net income of $37,078. This is after an offset of $838 has been applied.
The above calculations do not include the Flood Levy.
Net Income Table (Scenario 2.2 – starting an account-based pension)
| Chris: Total Disposable Gross Income | |
| Pension | $4,519 |
| Employment Income | $40,000 |
| Account Based Pension | $14,500 |
| Interest | $0 |
| Total | $59,019 |
| Less tax | $6,130 |
| Other Deduction | |
| Net Income | $52,889 |
For 2010/11, the Senior Australian Tax Offset for a single person with a taxable income of $44,519 is $524. For the 2011/12 financial year, with a gross income of $44,519, the tax and Medicare Levy payable is $6,130 leaving a net income of $38,389. This is after an offset of $524 has been applied. The above calculations do not include the Flood Levy.
Note: By opting to start an account-based pension, Chris can expect the following outcomes:
- receipt of the pensioner concession card.
- eligibility for a superannuation co-contribution of approximately $580.
- tax-free income and earnings from account based pension and therefore save on 15% tax on earnings:
Case Study 3: Frank (retired) & Janet (age 60 and working), $550,000 in super and other savings
Frank is of Age Pension age and completely retired. Janet is 60 years old and is working earning $42,000pa. They have a budget of $1,000pw ($52,000pa). If Frank leaves his super in accumulation phase, the Age Pension income and assets test mean that Frank would receive no Age Pension. If Frank withdraws his superannuation and makes a non-concessional contribution of $450,000 into Janet’s superannuation accumulation account, then his Age Pension entitlement is $194 a fortnight. Alternatively, if Frank chooses to start an account-based pension, his Age Pension entitlement will also be $194 a fortnight, but net income will be substantially higher.
3.1 Assume Frank leaves his super in accumulation phase
| Frank &Janet: Financial Assets – Couple | Totals | ||
| Bank Accounts | $100,000 | ||
| Superannuation | $450,000 | ||
| Shares | |||
| Loans & Excess Gifts | |||
$550,000 | |||
| Deemed Income | |||
| $74,400 | $74,400 | 3.0% | $2,232 |
$475,600 | 4.5% | $21,402 | |
$550,000 | p.a. | $23,634 | |
Frank & Janet’s financial position is…
| Frank & Janet: Centrelink Assessment | |||
| Type | Detail | $ Asset | $ Income |
| Financial Assets | (deemed income) | $550,000 | $23,634 |
| Acct Based Pension | |||
| Employment Income | Janet | $42,000 | |
| Real Estate | |||
| Other | |||
| Other | |||
| Home Contents | $10,000 | ||
| Motor Vehicles | $20,000 | ||
| Totals | $580,000 | $65,634 | |
| Work Bonus Red’n | must be APA & on pension | ||
Income p.a. | $65,634 | ||
Assets / Income p.f. | $580,000 | $2,524 | |
Applying the level of Frank & Janet’s income and assets…
| Frank & Janet: Rate – Pensioner Couple (HO) each | **You are paid the lower rate | Max: | $564.50 | |||
| New Rate (50% Taper) | Rate p.f. |
| Min: | $24.30 | ||
$580,000 | Combined Assets: | $328.25 | Asset: | $265,000 | ||
$65,634 | Combined Income (pa): | $0.00 | ** | nonTax: | $27.70 | |
Age Pension outcome: Frank & Janet’s approximate rate of payment per fortnight is $0 (zero).
Frank & Janet’s net income if Frank keeps his super in accumulation phase:
Net Income Table (scenario 3.1)
| Frank & Janet: Total Disposable Gross Income | |
| Pension | $0 |
| Employment Income | $42,000 |
| Account Based Pension | |
| Interest @ 5% ($100,000 invested) | $5,000 |
| Total | $47,000 |
| Less tax | $6,648 |
| Other Deduction | |
| Net Income | $40,352 |
For the 2011/12 financial year, with a gross income of $44,500, the tax and Medicare Levy payable is $6,648 leaving a net income of $37,853. The above calculations do not include the Flood Levy.
3.2 Assume Frank withdraws his super and redirects the $450,000 to Janet’s super account as a non-concessional contribution
| Frank & Janet: Financial Assets – Couple | Totals | ||
| Bank Accounts | $100,000 | ||
| Superannuation | |||
| Shares | |||
| Loans & Excess Gifts | |||
$100,000 | |||
| Deemed Income | |||
| $74,400 | $74,400 | 3.0% | $2,232 |
$25,600 | 4.5% | $1,152 | |
$100,000 | p.a. | $3,384 | |
Frank & Janet’s financial position is…
| Frank & Janet: Centrelink Assessment | |||
| Type | Detail | $ Asset | $ Income |
| Financial Assets | (deemed income) | $100,000 | $3,384 |
| Acct Based Pension | |||
| Employment Income | Janet | $42,000 | |
| Real Estate | |||
| Other | |||
| Other | |||
| Home Contents | $10,000 | ||
| Motor Vehicles | $20,000 | ||
| Totals | $130,000 | $45,384 | |
| Work Bonus Red’n | must be APA & on pension | ||
Income p.a. | $45,384 | ||
Assets / Income p.f. | $130,000 | $1,746 | |
Applying the level of Frank & Janet’s income and assets…
| Frank & Janet: Rate – Pensioner Couple (HO) each | **You are paid the lower rate | Max: | $564.50 | |||
| New Rate (50% Taper) | Rate p.f. |
| Min: | $24.30 | ||
$130,000 | Combined Assets: | $564.50 | Asset: | $265,000 | ||
$45,384 | Combined Income (pa): | $194.12 | ** | nonTax: | $27.70 | |
Age Pension Outcome: Frank & Janet’s approximate rate of payment per fortnight is $194
Net Income Table (by making super contribution to Janet’s account)
| Frank & Janet: Total Disposable Gross Income | |
| Pension | $5,047 |
| Employment Income | $42,000 |
| Account Based Pension | |
| Interest @ 5% ($100,000 invested) | $5,000 |
| Total | $52,047 |
| Less tax | $6,648 |
| Other Deduction | |
| Net Income | $45,399 |
Note: By opting to withdraw his super and redirect to Janet’s super account, Frank and Janet can expect the following outcomes:
- receipt of the pensioner concession card.
- eligibility for a superannuation co-contribution of approximately $580.
- tax-free income and earnings from account based pension and therefore save on 15% tax on earnings
- still be short of their budget by approx $7,000pa but they could draw down on some of their funds in the bank.
3.3 Assume Frank starts an account-based pension with $450,000 in super account
Alternatively, Frank commences an account based pension with his accumulated super drawing 5% annual income.
| Frank & Janet: Financial Assets – Couple | Totals | ||
| Bank Accounts | $100,000 | ||
| Superannuation | |||
| Shares | |||
| Loans & Excess Gifts | |||
$100,000 | |||
| Deemed Income | |||
| $74,400 | $74,400 | 3.0% | $2,232 |
$25,600 | 4.5% | $1,152 | |
$100,000 | p.a. | $3,384 | |
Frank & Janet’s financial position is…
| Frank & Janet: Centrelink Assessment | |||
| Type | Detail | $ Asset | $ Income |
| Financial Assets | (deemed income) | $100,000 | $3,384 |
| Acct Based Pension | Gross annual income $22,500 | $450,000 | $0 |
| Employment Income | Janet | $42,000 | |
| Real Estate | |||
| Other | |||
| Other | |||
| Home Contents | $10,000 | ||
| Motor Vehicles | $20,000 | ||
| Totals | $580,000 | $45,384 | |
| Work Bonus Red’n | must be APA & on pension | ||
Income p.a. | $45,384 | ||
Assets / Income p.f. | $580,000 | $1,746 | |
Applying the level of Frank & Janet’s income and assets…
| Frank & Janet: Rate – Pensioner Couple (HO) each | **You are paid the lower rate | Max: | $564.50 | |||
| New Rate (50% Taper) | Rate p.f. |
| Min: | $24.30 | ||
$580,000 | Combined Assets: | $328.25 | Asset: | $265,000 | ||
$45,384 | Combined Income (pa): | $194.12 | ** | nonTax: | $27.70 | |
Frank & Janet’s approximate rate of payment per fortnight is $194.
Net Income Table (scenario 3.3 – starting an account based pension)
| Frank & Janet Total Disposable Gross Income | |
| Pension | $5,047 |
| Employment Income | $42,000 |
| Account Based Pension | $22,500 |
| Interest @ 5% ($100,000 invested) | $5,000 |
| Total | $74,547 |
| Less tax | $6,648 |
| Other Deduction | |
| Net Income | $67,899 |
Note: By starting an account-based pension, Frank can expect the following outcomes:
- Frank would receive the pensioner concession card
- Janet would be eligible for a government co-contribution of approx $580
- Frank’s account based pension would be tax free and therefore save on 15% tax on earnings:
- $450,000 @ 5%pa = $22,500 pa earnings (minus 15% tax = $3,375)
- Overall net gain from strategy = $9,002 (gained pension, co-contribution & saved on earnings tax)
- Frank & Janet would exceed their budget of $52,000 by approximately $15,000pa. This could then be re-invested into Janet’s name in accumulation superannuation as a non-concessional contribution.
On the guest contributor section of this website, I point out how $1 million can last longer than you by using an account based pension from a SMSF where the asset allocation is mainly Australian shares with imputation credits.
I have a friend who receives a part age pension from Centrelink which means he satisfies either the income or assets tests. He also use an account based pension from his SMSF and that means he benefits from the advantages listed above.
Even though he is on the age pension, he also uses my strategy where his SMSF is mainly based on Australian shares with imputation credits. This brings him a number of benefits.
1. He says he can achieve about 8% yield on his SMSF but his part age pension is determined by his deemed income not his actual income. So any SMSF income he gets above the deeming rate is a bonus and it does not affect his Centrelink pension.
2. Because he has the income security of both Centrelink and the predictable income from dividends, he can afford to take on more volatility risk. That means he can afford to have an asset allocation with a higher proportion devoted to growth assets, in this case Australian shares. So he gets high income from growth asset. He gets the best of both worlds.
3. Because his age pension is set by the assets test, when the share market has a periodic downturn, the market value of his assets (his SMSF shares) declines so he is entitled to a higher Centrelink pension, but his dividends from his SMSF are largely unaffected. So a market downturn actually means more income for him.. His Centrelink pension acts as a huge shock absorber to the volatility fo the share market..
He reckons he has the opposite problem. Because his income comes from a growth asset, he is concerned that the assets in his SMSF may grow to the point where he is no longer eligible for the Centrelink pension. I tell him that is a high quality problem to have.
Comletely agree with you Jon.
Most couples that I see currently need around $40,000pa to live off as long as they own their own home.
That is quite achievable just by having $200,000 in an account based pension.
A couple that has $200K in an account based pension drawing 6% annual income will take home $12,000pa tax free along with the maximum rate of age pension $29,354pa (as long as their combined assets don’t exceed $265,000).
That will give them a tax free take home pay of $41,354pa.
Based on your investment strategy in the article recently published the $200,000 should go a long way to outlasting them!
Cheers