Age pension: a means to an end

From September 20, 2009, a range of changes have been introduced as part of the Government’s ‘Secure and Sustainable Pension’ reforms. This includes a change to the income test taper rate.

When looking at strategies to optimise age pension entitlements, it is important to understand the interaction between the income and assets tests. This article explains the application of the means tests and highlights the financial planning opportunities available to advisers.

The level of Centrelink benefits paid to a pensioner is based on the assets and income tests. The rate of payment is calculated under both the income and assets test. The test that results in the lower rate (or nil rate) is the one that applies.

Most individuals who were in receipt of a pension on September 20, 2009, including all maximum rate pensioners, were entitled to a higher rate of pension as a result of the pension increases and indexation from that date. However, due to the change in the income test taper rate (from 40 cents in the dollar to 50 cents in the dollar), transitional arrangements have been implemented to ensure that no existing pensioners are disadvantaged.

The transitional arrangements protect the entitlements of individuals who were receiving a pension prior to September 20, 2009. Those pensioners will be assessed under both the old means test rules and the new rules. If the new rules produce the same or a higher payment, the person’s entitlement will be permanently assessed under the new rules. If they would be worse off under the new rules, they would be paid under the transitional rules.

Once a person no longer benefits from the transitional arrangements, their rate is to be determined by the rate and income test rules that apply to people who begin receiving a social security pension on or after September 20, 2009 (ie, the new rules).

This article focuses on the income and assets test treatment of individuals who are subject to the new pension rates, that is:

• new pension recipients from September 20, 2009; and
• individuals who were receiving a pension prior to September 20, 2009, and who are not disadvantaged by the new rules.

The assets test assesses financial investments as well as personal assets such as home contents and motor vehicles. The principal home is not included in the assets test.

Assets are generally assessed at their market value. The market value is the amount a person would expect to receive if they sold the asset on the open market, less any debts or encumbrances secured against the asset. The amount of the assessable assets is subject to the assets test.

Examples of investments that are not assessed under the assets test include:

• superannuation savings for people under age pension age; and
• exempt funeral investments up to $10,750 per person or couple.

Complying income streams such as lifetime and life expectancy annuities or term allocated pensions may be treated as fully or partially exempt from the assets test, depending on the characteristics in the income stream and the date of purchase.

Under the assets test, pensioners with assets under the full pension threshold receive the full payment rate of $671.90 per fortnight for single people and $1,013 combined per fortnight for a couple. There is a gradual decrease of entitlements where assets are between the lower and upper thresholds, with pensioners losing $1.50 per fortnight for every $1,000 of assets over the lower threshold.

Table 1 outlines the lower and upper assets test thresholds for single people and couples (for the period September 20 to December 31, 2009). The ‘upper threshold’ column highlights the level of assets at which pension eligibility ceases.

The income test assesses income received (including income streams, salary and rental income) as well as the deemed income from financial assets. For pensions and annuities, the assessable income is generally based on the actual income received less a deductible (exempt) amount.

Under the income test, pensioners with income under the full pension threshold receive the full payment rate of $671.90 per fortnight for single people and $1,013 per fortnight for a couple. Under the revised income test taper, fortnightly income over the full pension amount reduces pension entitlement by 50 cents in the dollar for singles and 25 cents in the dollar each for members of a couple.

Table 2 outlines the income test thresholds for single people and couples (for the period September 20 to December 31, 2009).

Assets that are not subject to the deeming rules include:

• investments in superannuation held by people under age pension age; and
• income streams other than short-term annuities.

Age pension entitlements are determined separately using both of these tests. The test that results in the lower rate (or nil rate) is the one that applies.

The graphs below show the interaction between the tests based on the pension rates and thresholds in effect as at September 20, 2009.

It is assumed that clients hold non-income producing ‘lifestyle’ assets, such as furniture and motor vehicles of $20,000, with all remaining assets being financial assets subject to deeming.

The graphs show that homeowners are generally affected by the assets test rather than the income test. The low deeming rates are largely responsible for this result.

The graphs show that at lower levels of asset holdings, it is the income test rather than the assets test that determines age pension entitlements. Each dollar of income above the income test threshold reduces entitlements by 50 cents. Thus, assuming a deeming rate of 3 per cent per annum, each additional $1,000 of financial assets will reduce the age pension by $15 per annum ($1,000 x 3 per cent x 50 cents).

At higher levels, it is the assets test that determines eligibility. For each $1,000 of assessable assets above the lower assets test threshold, entitlements reduce by $1.50 per fortnight ($39 per annum).

The ‘crossover point’ is the point at which a person switches from being affected by the income test to being affected by the assets test. Below the crossover point, it is possible to use ‘income test-friendly’ investments, such as allocated pensions, to increase age pension entitlements.

Based on current rates and thresholds, the charts show that there is almost no scope to use ‘income test-friendly’ investments to increase age pension entitlements for homeowners.

The crossover points between the income and assets tests in the graphs are outlined in table 3 (to the nearest $5,000).

Ryan Krawitz is a technical services manager at AXA Australia.