Maximising Pension Eligibility

To qualify for an age pension, veterans pension or social security allowance an applicant must pass two tests - the Assets Test and the Income Test. Whichever test reduces the pensioners entitlement the most is the one that applies.

The tests are designed so people with some savings but not enough to be financially independent are entitled to welfare benefits to supplement their investment income.

However there are differences in the way investments are assessed under the tests so smart financial planning can increase pension eligibility considerably.

There are very few exemptions from the pension means tests. A persons home is exempt, and the surrounding living area. In practice this is accepted as being a maximum of five acres or two hectares. Land owned in excess of this is assessed as an asset.

Invalid aids are also exempt from the means tests. So too are medals for valour. Got a VC in the cupboard? It will be exempt. Not much else is excluded.

Home contents, personal possessions, cars, and anything else of value are assessable. Fortunately the amount that must be declared is the market or second hand value, not the insurance value or replacement cost.

Can you give all your assets away? You can but the value will still be counted against you. Pensioners may gift a total of $30,000 over five years, with a maximum of $10,000 in any one year. Amounts gifted in excess of this are assessed as if they were still owned, for five years.

So what investments are treated concessionally in the pension means tests?
Superannuation balances are exempt from both tests until age pension age. That is 65 for men and currently 63 for women.

Anyone under pension age can make new super contributions and they will be exempted, thereby increasing the persons social security benefits.

The only completely means test exempt investment for people any age is a pre-paid funeral plan. A pensioner can invest up to $5,000 in a funeral bond and its account balance will always remain exempt from assessment. This could increase pension by $15 per fortnight or $390 per year.

Investments such as bank deposits, shares, property and managed funds are fully assessable under both Assets and Income Tests. Retirement income stream investments are the one major area that is assessed concessionally.

All annuities and allocated pensions are assessed more leniently under the Income Test than other investments. The purchase price is divided by the investors life expectancy and the resulting amount is exempt from the Income Test.

Only payments in excess of this are assessable. For most people this amount is small, at least in the early years. For example a 65 year old could receive $6,369 annual income from a $100,000 allocated pension account but only $720 of it would be assessed.

Long term annuities and the new Term Allocated Pensions (TAPs) have another big advantage in that only half their value is assessed in the Assets Test. Half is excluded from the assessment.

This provides an excellent opportunity to greatly increase an age pension. Moving $100,000 of retirement savings to a TAP could see a persons pension jump by $150 per fortnight or $3,900 per year.

Long term annuities are very restrictive and rarely pay a lump sum back. TAPs are more user friendly but have restrictions on cashing them before death. Normal allocated pensions have fewer restrictions and Income Test advantages but lack the 50 per cent Assets Test exemption.

Many pensioners are affected by both the Assets and Income Tests. To maximise pension we must determine which test prevails, calculate the point of equal entitlement under both tests, and use suitable investments to reduce the assessment under the dominant test so both are equal.

Written By Russell Tym, Authorised Representative of MoneyLink Financial Planning, AFSL No 247360

This article is bought to you by Imperator Financial and Money Link Financial Planning


No investment advice provided to you. This web site is not designed for the purpose of providing personal financial or investment advice. Information provided does not take into account your particular investment objectives, financial situation or investment needs. You should assess whether the information on this web site is appropriate to your particular investment objectives, financial situation and investment needs. You should do this before making an investment decision on the basis of the information on this web site. You can either make this assessment yourself or seek the assistance of any financial adviser.