Q: I’m over 65 and a member of a super fund, from which I receive an account-based pension. I need to withdraw a lump sum of $40,000 from my super, as my super is not enough to live on. I will have to apply for a part pension (Age) from Centrelink. Will my lump sum be counted as income in the Centrelink income test?
A: You will need to check your specific Age Pension entitlements with Centrelink, although I can provide you with a general explanation of how the Age Pension rules apply to a superannuation lump sum.
A lump sum withdrawn from a super fund is considered an ‘exempt lump sum’ for the purposes of the Age Pension income test, although the lump sum may count towards the Age Pension assets test.
If a person spends the superannuation lump sum immediately, for example, on living expenses, or on the home mortgage or on home improvements, then the superannuation lump sum does not count towards the Age Pension income test or assets test.
Alternatively, if the person deposits the cash in the bank, or purchases an assessable asset (such as shares, holiday home, car or other lifestyle assets) with the cash, the purchased asset is counted against the Age Pension asset test, PLUS the assets are subject to deeming. Deeming means a notional rate of income is assessed against the assets and that income is tested as part of the Age Pension income test.
I discuss the rules in more detail below, including the new treatment of superannuation pensions under the Age Pension income test.
Superannuation lump sums
If a superannuation lump sum is deposited in the bank or used to purchase other assessable assets, the ‘exempt lump sum’ under the Age Pension income test, becomes a ‘financial asset’ for the purposes of the Age Pension assets test.
As a financial asset, the amount would then be subject to the deeming rules for the purposes of the Age Pension income test, which means that Centrelink assumes a certain rate of return on that lump sum and that ‘deemed’ return on the lump sums then counts towards the income test. In short, the superannuation lump sum (if it becomes a financial asset) doesn’t count towards the Age Pension income test, but a deemed rate of return on that lump sum counts towards the income test. I explain the deeming rules in the SuperGuide article Age Pension income test: Deeming rates and deeming thresholds.
The Department of Human Services website publishes a helpful page titled ‘Lump sums’, explaining how different types of lump sums are treated for the Centrelink income test (click here).
Superannuation pension assets are assessed under the Age Pension assets test (unless a person has a special type of non-commutable pension started before September 2017, and then only 50% is assessed, or nil is assessed).
In relation to superannuation pensions and how those pensions are assessed under the Age Pension income test rules, it depends on WHEN the person started claiming the Age Pension, and WHEN the superannuation pension commenced.
If started receiving Age Pension and started super pension BEFORE January 2015: Pension payments (not lump sums) from super pensions are assessed for the purposes of the Age Pension income test, and are subject to a special calculation that recognises the pension payment includes a return of some of the original capital (see SuperGuide article Age Pension: Deduction amount still applies for income test, sometimes).
If started receiving Age Pension and/or started super pension ON OR AFTER 1 January 2015: The superannuation pension is subject to the deeming rules, which means a deeming rate is applied to the value of the pension assets, and this notional income is assessed against the Age Pension income test. The pension payments, and whether the payments include a return of capital, are not considered under the new rules (see SuperGuide article Age Pension income test: Deeming rates and deeming thresholds).
For more information on the deeming rules and superannuation pensions, especially the rules that took effect before, and on or after 1 January 2015, see SuperGuide article Income test changes (January 2015) mean less Age Pension forever.
Background: An individual must satisfy both the Centrelink income test and assets test to be eligible for a full or part Age Pension. For more information on the Age Pension see the following SuperGuide articles:
- Australian Age Pension: 10 important facts you should know
- Age Pension changes: More Australians entitled to payments since September 2018
- Latest Age Pension rates (since September 2018)
- Australian Age Pension: Am I eligible and how do I apply?
- Age Pension: Income test thresholds applicable since September 2018
- Age Pension: Are you eligible for the Work Bonus?
- Age Pension: Assets test thresholds applicable since September 2018
- Age Pension age increasing to 67 years (not 70 years)
- Age Pension: Is my super benefit counted towards the assets or income tests?
- Income test changes (January 2015) mean less Age Pension forever
- Age Pension income test change hits funded defined benefit pensionss
- Age Pension income test: Deeming rates and deeming thresholds
- Less Age Pension, and paid to fewer Australians since January 2017
- Retirementgate: Government’s Age Pension debacle hits middle Australia