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Australia has a means tested social security system, which is designed to work like a safety net.
The more in assets or income you have, the less Age Pension you may be entitled to.
If your assets or income exceed the cut off limits, you will not be eligible to a pension at all.
The current maximum rates of Age Pension are:
- For singles – $933.40 per fortnight
- For couples – $703.50 per fortnight each
(Rates effective from 20 September 2019 to 19 March 2020 and include base pension plus supplements.)
Times are a changing
Over the past 15 years there have been significant changes to the assessment of assets and income for social security purposes. Unfortunately, it’s been nothing but bad news.
The most significant change came at the start of 2016 with the rebalancing of the asset test measures. The majority of Age Pensioners saw a significant decrease to their pension rate or a complete loss of pension entitlements altogether.
As a result, we’re now expected to utilise more of our own savings to fund retirement as opposed to the pension providing the bulk of retirement income.
The bigger picture
For every $10,000 of assets above the allowable threshold your pension rate reduces by $780 per year or $390 per year each if you’re a couple – see our previous article on how the Age Pension is assessed. This means the lower your assessable assets, the more pension you’re going to receive.
Careful restructuring of your assets can provide a welcome boost to your rate of age pension but it’s important to remember that $10,000 is always worth more than $780. I’ve come across many clients who are hyper focused on maximising their pension entitlements to the detriment of their overall financial position. The takeaway is – it’s important to look at the bigger picture.
Let the Age Pension do the heavy lifting
The more work your pension does, the less you’ll eat into your retirement savings. This is important because a challenging investment market and increased life expectancies have made it difficult to ensure that your retirement savings will last the distance.
There are many strategies you can employ to ensure that you’re making the most of your Age Pension, and I’ll go through a selection of options that may assist.
If you’re receiving the maximum rate of Age Pension, then Centrelink can’t pay you anymore. These tips work best for those on a part pension or those who are not receiving anything at all, but could restructure to create eligibility.
Here’s my list of 12 top tips to maximise your Age Pension:
1. Correct your asset valuations
It’s important that you correct the values of your assets such as, bank accounts, investments, cars, and home contents regularly. It’s a common misconception that Centrelink will update your assets for you – this is not the case. The majority of your assets depreciate over time which provides an opportunity to increase your pension.
The most common mistake I encounter is overvaluing cars and home contents. As a guide, a fair valuation of home contents is $10,000 for couples and $5,000 for singles. Centrelink requires second hand value not replacement or insurance value. Reducing your asset valuations by $10,000 could see a potential increase of $780 per year in pension.
2. Find more payments
Currently Centrelink has over 50 payments and supplements available. Now you’re not going to be able to claim them all, but just finding out where to start can be hard.
This is where you need to use the payment finder. The payment finder on the Centrelink website acts like a funnel – you enter your personal information and it provides a list of your potential entitlements. There are some weird and wonderful payments you’ve probably never heard of that make the list, but nothing ventured nothing gained!
I’ve seen clients that are missing out on over $10,000 per year of payments because they, (like most of us) are unaware of the myriad of payments available. By obtaining the Carer Allowance, Rent Assistance or Essential Medical Equipment Payment for example, you could increase your retirement income by thousands of dollars each year.
3. Pay down debt
The benefit of paying off debt can be two-fold – you can save interest and increase your pension. As you may be aware, Centrelink count the value of your bank balance towards the asset test but don’t reduce your assets by your debt – except for investment debt. By paying off your credit card, personal loan, home loan or any other debt, you will reduce the value of your assessable assets and boost your rate of pension. For example, paying off $50,000 of debt has the opportunity to increase your pension by $3,900 per year.
4. Lifetime annuities
The legislation around lifetime annuities has just changed on the 1st of July 2019. The popularity of these are set to explode as retirement income policy evolves. Below are a couple of examples of the advantage a lifetime annuity can offer.
- A $100,000 investment into a lifetime annuity will only count as a $60,000 asset immediately ($3,120 per year instant increase to pension) due to a 60% assessable value.
- At your life expectancy or 5 years – whatever comes last; your annuity assessable value will only be 30% of the purchase price. This will provide a further $3,120 per year increase to your pension.
5. Take advantage of your younger spouse
We’ve explored this strategy in a previous article around Age Pension case studies. Superannuation in the accumulation phase is ‘quarantined’ from Centrelink assessment until Age Pension age. This provides the opportunity to take advantage of your younger spouse, if one of you is pension age and the other is not.
By utilising the ‘bring forward provisions’ you can contribute up to $300,000 into your spouse’s superannuation account. Moving $300,000 from the assessable environment into your younger spouses exempt super account can increase your Age Pension by up to $11,700 per year.
Centrelink allow you to gift up to $10,000 per financial year and a maximum of $30,000 over a 5-year rolling period. Your generosity will provide a potential $780 per year extra in Age Pension. If you gift $10,000 per year over 3 separate financial years, you’ll see an increase of up to $2,340 per year in Age Pension.
An important thing to consider with gifting is timing. Centrelink only look retrospectively at the last 5 years. If you gift away your $400,000 holiday house at the age of 60, when you turn 65 and claim the pension that gift will not be assessed. Consider gifting early to maximise future pension entitlements. For example: A $400,000 gift 5 years prior to Age Pension age could see an increase to pension of $31,200 per year.
7. Structure your investment loans correctly
Your principal home is exempt from Centrelink assessment and therefore any loans secured against it can’t be utilised to reduce your assessable assets.
Any loans secured against your investment assets (loans used for the purpose of investing) can reduce the assessable asset value of the investment.
- A $500,000 investment property – $200,000 loan secured against your principal residence = $500,000 assessable asset.
- A $500,000 investment property – $200,000 loan secured against the investment property = $300,000 assessable asset.
By structuring your loans to your advantage, your Age Pension can increase by $15,600 each year in this scenario.
8. Pre-pay your funeral or purchase a funeral bond
Pre-paying your final expenses can be a way to reduce your assessable assets (bank account) and increase your Age Pension. There’s no limit as to how much you can pay for a pre-paid funeral or burial plot.
The allowable limit for funeral bonds – where no funeral director has been nominated – is $13,250. Investing this amount could result in an increase in your pension of up to $1,033 per year.
9. Special Disability Trusts
Special Disability Trusts provide for the care and accommodation needs of a family member with a severe disability.
- Eligible family members are able to contribute up to $500,000 into the trust without this being counted towards Centrelink’s gifting rules.
- Better still, the assets held within the trust are exempt for the principal beneficiary (up to $681,750) meaning that it will not affect their rate of Disability Support Pension.
- By contributing $500,000 to a Special Disability Trust a couple could go from no pension entitlement to the full rate of pension, which is $36,301 per year. Singles could also increase their payment to the maximum, which is 24,081 per year.
10. Lump sum payment of expenses in advance
Spending money on things like holidays, home improvements, rent or other lump sum costs, is a way to reduce your bank account and increase your pension. Centrelink allow you to pre-pay lump sum costs up to one year in advance. By prepaying a $10,000 holiday one year in advance has the potential to increase your pension by $780 for the year.
11. Work to top up your pension
Another recent change to legislation was the increase to the work bonus incentive.
An eligible pensioner can now earn $300 per fortnight of employment or business income and this will not count towards the income test.
The good news is that if you do not use the $300 per fortnight available, then it banks into your ‘work bonus balance’. This is great for those with lumpy incomes, for example, exam supervisors, Santa at Christmas, electoral officers etc.
By utilising your full $300 per fortnight of work bonus you’ll get a boost to your income of $7,800 per year without impacting your rate of Age Pension. As a couple the work bonus doubles to $15,600 per year ($7,800 per year each).
12. Granny flat or life interest arrangements
A granny flat or life interest arrangement is the agreement to accommodate someone for the remainder of their life in return for a lump sum payment, asset, or transfer of real estate.
The amount that’s paid towards the life interest arrangement may be exempt in full (depending on a reasonableness test calculation) meaning you could reduce your assessable assets significantly by purchasing your accommodation for the remainder of your life.
This is a popular strategy for pensioners who would like to downsize and live close to their adult children to ensure that their future care needs are covered.
Under the reasonableness test, a 65 year-old could contribute $779,749 towards a life interest and this would be exempt from Centrelink assessment. This could mean the difference between getting no pension and a full Age Pension.
Finally – seek professional advice
This isn’t an exhaustive list of all options available to increase your Age Pension entitlements. Everyone’s financial situation is different and it’s vitally important to seek personal financial advice to achieve your own goals and objectives.
Learn more about the Age Pension in the following SuperGuide articles:
- Case studies: How is the Age Pension assessed?
- Deeming rates for the Age Pension income test
- Age Pension calculator: How much could you be eligible for?
- Australian Age Pension rates (March 2020 to September 2020)
- Age Pension income test rules (March 2020 to July 2020)
- Age Pension assets test rules (March 2020 to July 2020)
- How does your super affect the Age Pension?
- What are the Age Pension residency rules?
- Are you getting your slice of the Age Pension Work Bonus?
- Am I eligible for the Australian Age Pension?
- Retirement age calculator: When can you access your super or the Age Pension?
- How do I apply for the Australian Age Pension?
Learn more about retirement income in the following SuperGuide articles:
- Video: How do you plan your income needs in retirement?
- Is a bucket strategy the solution for your retirement income plan?
- Retirement cost of living: How much does a comfortable lifestyle cost?
- How much super do I need to retire?
- How inflation affects your retirement income forecast
- ‘Today’s Dollars’: The impact of inflation on retirement income
- Retirement income in Australia: An overview
- Target retirement income: An explanation of the 66-80% rule of thumb
Regan Welburn is the director of My Pension Manager, an administration service specialising in Age Pension applications and dealing with Centrelink. Regan previously worked for Centrelink as a Financial Information Service Officer and has an intricate knowledge of the Social Security system.
Disclaimer: The information in this article is of a general nature only and cannot be considered financial advice. It is important to seek professional accredited financial advice when considering whether the information is suitable to your personal circumstances.