How to use the Age Pension in retirement

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A common misconception is that retirement income is either self funded from superannuation savings or government funded by means of the age pension. While this may be true for some, many retired Australians receive a part-age pension as a supplement to their super. It’s therefore essential to understand how super impacts eligibility to receive the age pension.

Are you eligible?

Firstly, to receive the age pension, a person must meet the age criteria. Currently, men must be 65 years old and women, 64 and a half years old to qualify. The age pension age will gradually increase from 2014 for women, and then from 2017 for both men and women until it reaches 67 in 2023.

Secondly, the pensioner must be an Australian resident who is present in Australia on the day the claim is lodged. A 10-year qualifying residence is necessary, unless certain conditions are met.

Lastly, age pension entitlements are means tested by Centrelink using two tests: the income test and the asset test. Eligibility is based on whichever test provides the lowest entitlement.

Super balances, assets, contributions and benefits may affect the income and assets tests, and therefore a person’s ability to access the age pension, in the following ways:

The income test

Super in accumulation phase

Super assets held by anyone of pension age will be included in the income test, where deeming provisions apply. Deeming assumes a percentage of income on the investments at a rate that depends on the value of the assets and whether they belong to a single pensioner or a pensioner couple. The actual income derived from the asset is disregarded. Income from assets held by anyone under the pension age is exempt.

Super in pension phase

Income derived from the super pension, less any exempt amount, is assessed in the pension phase.

The exempt amount is the purchase price of the super pension divided by the pensioner’s life expectancy when the super pension commences. For example, if the super pension was started with $100,000 and a 20-year life expectancy, up to $5,000 of the annual amount withdrawn will not count towards the income test.

Also taken into account are any salary sacrifice contributions into super. While lump sums from super are not included, the income and/or asset test may apply if those funds are later invested, such as in shares, term deposits, bonds or managed investments. Further, a lump sum will reduce the exempt amount under the income test. In the previous example, the $100,000 super pension would be reduced by a lump sum withdrawal, of say $20,000, and over the same life expectancy will result in a lower exempt amount of $4,000.

The asset test

Super in accumulation phase

Super assets held by anyone of pension age will be included in the asset test and assessed at the market value equal to the account balance. Super assets held by anyone under pension age are exempt.

Super in pension phase

The capital value of the super assets are assessed, unless an asset test exemption applies.

The asset test exemption of income streams depends when they were purchased. Income streams purchased before 20 September 2004 will continue to be 100% exempt from the asset test. Complying income streams purchased from 20 September 2004 to 19 September 2007 are entitled to a 50% asset test exemption.

Any income stream purchased on or after 20 September 2007 is fully assessed under the assets test. As purchasing an income stream requires an identifiable account balance, certain defined benefit income streams that have no identifiable account balance will have a 100% asset test exemption regardless of commencement date.

Maximising your age pension entitlements

When someone reaches age pension age, starting a super pension (if not already in place) may be more beneficial for age pension entitlements than having funds outside of super. This is because super pensions receive more generous income test treatment. As discussed above, this is due to an exempt amount of a super pension that is not assessable.

If an individual reaches age pension age but their spouse is still under it, super assets or income from those assets held in the spouse’s accumulation account will not be counted towards either the income or assets test.

It’s worth exploring whether building up a younger spouse’s super – for example, with eligible spouse contributions or contribution splitting – before the individual reaches pension age will result in a greater age pension entitlement. However, be conscious of age-related contribution restrictions and contribution caps.

Also consider the timing of when the younger spouse commences a super pension because this will determine whether their super is counted towards the income and asset tests. As super benefits are able to be withdrawn at preservation age, currently 55 (which is below pension age), there is scope to delay super withdrawals and shelter super from counting towards age pension tests until the spouse reaches age pension age.

Investments in super that are counted under the income test should earn at least the deeming rate that applies for financial investments (as defined for age pension). An individual will be better off under this test if their returns are higher, since it’s the deemed rate that applies and not the actual rate of return. Greater returns on financial investments will not affect age pension entitlements under the income test.

Do the maths

Be careful to ensure that the benefit from accessing the age pension is greater than other investments that, while reducing age pension entitlements, may achieve greater returns.

Also be mindful of living expenses. Even though a spouse under age pension with their super in the accumulation stage may increase the age pension available to the older spouse, the total amount of income including the age pension should be sufficient to meet the couple’s expenses. If this is not the case, the couple may be better off receiving a super pension from the younger spouse, assuming a condition of release has been met.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Any individual should, before acting, consider the appropriateness of the information in regards to their objectives, financial situation and needs and, if necessary, seek professional advice.

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