The Australian Aged Pension scheme provides a wonderful safety net for those with limited assets in retirement, although many remain confused by how their age pension entitlements differ from so called superannuation income streams.
The Federal Government provides an income for all Australians who reach pension paying age, currently set at age 67, who can prove they are an Australian resident and can also pass the income and asset tests or means test.
If you are part of a couple who own a home, you can qualify for a full age pension of $41,704 a year; if excluding your home, your other assets, including super, total less than $451,500 and can qualify for an ever-reducing part-pension, until your assets reach $986,500 a year.
The income test allows a couple to earn up to $9,360 a year from investments and still receive the full age pension, and up to $92,768 a year and receive a partial pension. In assessing your income, Services Australia applies a complex formula called ‘deeming’.
The deeming rules assume you earn at least 0.25 per cent a year on the first $100,200 in assets for a couple and then assume you are earning at least 2.25 per cent a year on your remaining assets. You must pass both tests to receive a pension and Services Australia will use the test that leads to the lowest entitlement.
In addition to the income from investment assets, you can also receive income from genuine employment of up to $7,800 a year under the Work Bonus scheme and still receive a full pension. This was temporarily increased to $11,800 a year between December 1, 2022 and December 31, 2023.
The rates and limits vary depending on whether you are a homeowner or not and whether you are part of a couple. Superannuation is included as part of the assets and income test, although superannuation can provide income support in addition to the aged pension.
So, superannuation sits alongside the age pension scheme, effectively topping up the pension or other income older Australians receive as they move into retirement. It is not subject to any limitations or qualifying factors.
Once you reach preservation age, which is 60 years of age for most people, you can effectively start your own private pension from your superannuation account. Once you do this, all the assets within super supporting this pension become tax-free in terms of earnings and capital gains. The income received is also tax-free in your hands.
This can significantly benefit older Australians as it means that they can effectively start a private pension to top up their age pension entitlements. For many, this makes the difference between living from one pension payday to the next, to having a bit of spare cash to help them get by.
The asset and income tests provide generous limits for older Australians to qualify for the age pension, with most of the so-called loopholes for effectively ‘hiding assets’ from Services Australia having been closed or significantly reduced.
Importantly, the family home is excluded from the asset test, meaning a potential age pension recipient can have millions of dollars tied up in their own home and still qualify for the full age pension, depending on the size of their remaining assets.
For couples with a significant age difference, it is also possible to effectively move assets from the older partner into the younger partner’s superannuation account, where it won’t be included in the asset test.
As long as the younger partner is under Age Pension age themselves, and their superannuation account is still in accumulation mode or can still receive contributions, the assets held within that account will not be included by Services Australia when assessing the couple’s overall assets.
It is important to remember that when moving funds from one partner to another, you can contribute up to $110,000 in one financial year as a non-concessional contribution and $330,000 as a non-concessional contribution in any three financial year period under the “three-year bring forward” rule.
With some simple planning, it is possible to contribute up to $440,000 from one partner to a younger partner in a relatively short timeframe and so reduce the assets included in the age pension asset test accordingly.
These rules, though, are extremely complex and are best utilised under the guidance of a qualified financial planner to ensure you make the right decisions and avoid any costly mistakes.
* Rates and figures effective 1st July 2023.