Most people will have to rely on a mixture of income generated from superannuation pensions and the age pension. Photo: Andrew Quilty AQU
The unfortunate truth is that most people will have to rely on a mixture of income generated from superannuation pensions and the age pension they will get from Centrelink.
Understanding how a person becomes eligible for the age pension increases the chances of maximising income.
The first thing to understand is that a person must reach the age pension age. At present, that age for men is 65 and for women is 64.5. This will increase to 65 for women born from January 1, 1949 to June 30, 1952. For both men and women born after June 30, 1952 the eligibility age will increase gradually to 67.
It is important to know when you and your partner will become eligible for the age pension from a younger age. Until a person reaches age pension age, unless they are receiving a pension from their super fund, their super is not counted under the tests applied by Centrelink.
The two tests used are the assets test and the income test. Under the assets test the total value of an individual's or a couple's assets is totalled. When this value is below a low asset threshold there is no reduction in the age pension. Where the total value exceeds the threshold the pension is reduced until no pension is receivable.
Two main asset-test limits are used. For every $1000 in total assets that exceed the lower limit, the fortnightly pension rate is reduced by $1.50 until the upper limit is reached, at which point no pension is receivable. The lower limit is increased at various times while the upper limit increases annually in line with increases in the fortnightly pension rate. The limits are different for home owners and non-home owners.
Assets counted in this test are virtually everything a person owns, including household contents, cars, caravans, investments including superannuation and cash. The value that must be placed on these assets is current market value.
The income test
The second test is the income test. Where a person's income exceeds a low threshold, their fortnightly pension is decreased by 50¢ in the dollar for a single person, and 25¢ in the dollar for each member of a couple. Once a person's income exceeds an upper threshold no age pension is payable.
There are in effect three types of income counted under the income test. The first is actual income and includes employment income, fringe benefits, net business income, income distributed from trusts and private companies, salary sacrificed as super contributions, net rental income and income received from boarders and lodgers.
The second is deemed income, where Centrelink deems an income to be earned on financial assets. Financial assets include bank, building society and credit union accounts, term deposits and debentures, managed investments, listed shares and securities, and superannuation account balances when the member is of pension age.
Once a total value for all financial investments is arrived at, two deeming rates are applied. A lower deeming rate applies to the value of financial assets below a threshold and a higher rate applies to the excess. The current deeming rates are 2.5 per cent and 4 per cent.
The third category of income relates to what Centrelink allows the actual income received to be minus what it regards as a purchase price. The most common example of this is a superannuation pension.
In simple terms, where one member of a couple reaches age pension age before their partner it makes sense to have more superannuation in the younger partner's name. This is because it will not be counted under either the income or assets test. Conversely, when a person is of pension age, less income will be counted if a pension is taken from a super fund rather than having the deeming rates applied.