Age pension: Securing the pension bonus

With the Secure and Sustainable Pension reforms that came into effect on September 20, 2009, reviewing a client’s age pension entitlement may require a few more steps. For instance, the following factors must be considered:

• Which maximum age pension entitlement rate applies? For singles it is $671.90 per fortnight, or $624.90 per fortnight (transitional); for couples, it is $1,013 per fortnight, or $1,009.40 per fortnight (transitional).
• Which income test taper rate to use: 50 cents per dollar or the transitional 40 cents per dollar over the lower income threshold.
• Whether the Work Bonus applies.

The first two of these considerations have been well publicised, and this article will investigate the new Work Bonus initiative in more detail.

The Work Bonus

The Work Bonus essentially allows concessional treatment of employment income for the Centrelink income test assessment. Coinciding with the introduction of the Work Bonus was the closure of the Pension Bonus Scheme (PBS) for new entrants, which was introduced on July 1, 1988. The PBS allowed a person of pension age who deferred receiving their age pension entitlement while they remained in the workforce in order to gain a tax-free lump sum once the ceased employment.

The Work Bonus on the other hand allows concessional treatment of employment income for the Centrelink income test assessment. The other crucial difference is that an age pensioner’s entitlement under the PBS was based on the results of their income and asset test calculated at the time they first claim their age pension entitlement, rather than during their employment.

Employment income concession

Under the Work Bonus rules, where a person’s employment income is under $500 per fortnight, then 50 per cent will be assessed for the income test. However, where their employment income is $500 per fortnight or over, the amount assessed will be reduced by $250 per fortnight.

From September 20, 2009, to be eligible for the Work Bonus the age pension recipient must not be receiving the transitional rate of pension. Where the transitional rules apply, any employment income continues to be counted towards the income test.

What is employment income?

Broadly, employment income for the purpose of the Work Bonus includes salary, wages, commissions and fringe benefits but specifically excludes:

• a compensation payment, or a payment to a person under an insurance scheme that relates to their inability to work and receive employment income;
• a payment to a person in relation to their termination of employment, including any leave payments received; and
• an income payment received from a superannuation fund, from a company or from a partnership.

The following examples highlight how the Work Bonus applies and affects a person’s age pension entitlement under the income test using both the post September 19, 09 rules and the transitional rules.

Example 1: single pensioner

John is a single age pensioner earning $450 per fortnight from employment. John owns his home, has an account-based pension (with a Centrelink deductible amount of $11,000) valued at $180,000 from which he is drawing $10,000 per annum, has $15,000 in a cash account (5 per cent) and personal effects to the value of $25,000 (see Table 2).

Based on the results from the income test alone, John’s age pension entitlement would be about $3,300 per annum higher under the post September 19 rules.

Example 2: couple

John and Jill are age pensioners earning $550 and $400 per fortnight from employment respectively. They own their home and John has an account-based pension (with a Centrelink deductible amount of $12,450) valued at $250,000 from which he is drawing $13,000 per annum. Jill has an account-based pension (with a Centrelink deductible amount of $6,818) valued at $150,000 from which she is drawing $7,500 per annum. They have $10,000 in a cash account (interest of 5 per cent) and personal effects to the value of $25,000 (see Table 3).

Based on the results from the income test alone, John and Jill’s combined age pension entitlement would be about $3,975.14 per annum higher under the post September 19 rules.

In the example in Table 3, both John and Jill receive the benefit of the Work Bonus. However, where one partner is not of age pension age, the Work Bonus benefit does not apply.

Pensioner and allowee couple

Where one member of a couple is an age pensioner and the other is an allowee, the income test is applied based upon each person using the couple rates. Using the same financial assumptions for John and Jill (except that Jill is receiving a Centrelink allowance) the age pension income test is calculated as laid out in Table 4.

Based on the results from the income test alone, John’s age pension entitlement would be about $367.12 per annum higher under the post September 19 rules. Jill’s allowance entitlement will also benefit from John’s Work Bonus.

Importantly, each of the above examples calculates the age pension entitlement under the income test only. To determine the exact amount of the entitlement, the asset test assessment must also be calculated, with the one providing the lower benefit being the actual entitlement. The other aspect to consider is that for pre September 20, 2009, age pensioners, the transitional rules will apply until the post September 19 rules provide the higher entitlement.

In summary, when reviewing a client’s age pension entitlement it is important to consider whether the transitional rules apply. If those rules don’t apply, the Work Bonus will allow for the concessional treatment of any employment income for a person who has attained age pension age.

Where this is not the case, and/or the transitional rules apply or the age pensioner is a member of the PBS, any employment income is not afforded the Work Bonus concessions.

Andrew Biviano is technical services & paraplanning manager at Fiducian Portfolio Services.