Pension Bonus Scheme vs Work Bonus

The Pension Bonus Scheme (PBS)

The Pension Bonus Scheme was incepted in 1998 as a way to entice people to work past their Age Pension age.

Essentially, if an individual opts to defer claiming the Age Pension and they, or their partner, continue to work after reaching pension age, they accrue a tax-free bonus that is payable when they eventually claim Age Pension.

The amount of tax-free bonus is calculated based on the time period the individual has been an accruing member of the scheme, the individual’s pension entitlement when they claim the Age Pension, and a set multiple.

The formula is: the Annual Pension Rate multiplied by 9.4 per cent multiplied by the years accrued squared.

To accrue a year, or part of a year’s, membership of the scheme, an individual (or their partner if they are also Age Pension age) must work 960 hours per year. The maximum number of years that can be accrued is five.

Case study: Vincent

Vincent is single and has accrued five years of membership of the PBS. Vincent claims the Age Pension on September 20, 2009, and is entitled to the maximum rate.

His bonus will be:

$16,484 x 9.4% x 52 (or 25)

= $38,737.40

Closure of the PBS

In the 2009 Federal Budget it was announced that the PBS would close to most new members.

Anyone who qualifies for the Age Pension (that is, they meet their age and residency requirements) after September 19, 2009, will not be able to register for the scheme.

If an individual who has yet to claim Age Pension, qualified for the pension before September 20, 2009, but did not register for the PBS before that date, they may still be able to register for the scheme (although it may be at Centrelink’s discretion). This may commonly occur where someone was unaware of the scheme’s existence.

The membership of those who registered for the scheme before September 20, 2009, will continue until they opt to claim the Age Pension.

Creation of the Work Bonus

While the Federal Government deemed the PBS insufficient incentive for individuals to work later in life, the issue of workforce longevity remains. As such it has legislated the Work Bonus, which will commence from September 20, 2009.

The Work Bonus

In determining how much (if any) Age Pension an individual is entitled to, Centrelink assesses an individual or couple’s income and assets.

Two tests are applied (the income test and the assets test) that reduce the maximum pension rate according to an individual or a couple’s income and assets (respectively) above set thresholds. The lower result determined by the two tests dictates an individual’s rate of pension.

The Work Bonus provides a dispensation for employment income earned after turning Age Pension age (currently 65 for men and 63.5 for women).

In essence, half of an individual’s employment earnings up to $500 a fortnight will not count as income under the income test.

For couples, each member may have up to half of $500 of their own income disregarded. This means that an individual’s assessable income may be reduced by up to $250 a fortnight, while couples may have up to $500 excluded.

Consequently, this may result in up to an extra $125 of Age Pension a fortnight (approximately $3,250 a year) for single pensioners and for each member of a pensioner couple.

Case study: Mia

Mia is a single pensioner who continues to work part-time after reaching Age Pension age. Mia earns $400 a fortnight from her employment. As a result of the Work Bonus, only $200 of her fortnightly income will be counted as income in calculating her Age Pension entitlement.

Which system provides the greater benefit?

The big question is, are people better off under the Pension Bonus Scheme or the Work Bonus? There are a few smaller differences that will make an impact.

Under the Pension Bonus Scheme an individual could accrue their 960 hours a year by being self-employed.

However, income earned as a sole trader or from a partnership does not qualify for the Work Bonus.

Additionally, the maximum accrual period for the PBS is five years whereas the Work Bonus can continue for as long as an individual continues to work after reaching Age Pension age.

That said, the important comparison is how much each benefit would save an individual.

Case study: Jules

Jules reaches age 65 and decides to continue working 20 hours a week for five years. He is single, has very few assets and no income other than his employment income.

Graph 1 compares:

• how much Jules would qualify for if he registered for the Pension Bonus Scheme; and
• how much Age Pension he would receive, factoring in the Work Bonus, if he earned $30,000, $40,000 or $43,000 a year.

As you can see, with an income of $30,000, Jules’ Age Pension payments are almost identical at the end of five years to the amount he would have received from the PBS. As his income increases, his bonus from the PBS far outweighs his Work Bonus-enhanced Age Pension income.

Case study: Fabienne and Butch

Fabienne and Butch are married and are both Age Pension age. Fabienne decides to continue working full time for five years while Butch retires. They have few assets and no income other than Fabienne’s employment income.

Graph 2 compares:

• how much Fabienne and Butch would qualify for if they registered for the Pension Bonus Scheme; and
• how much Age Pension they would receive, factoring in Fabienne’s Work Bonus, if she earned $30,000, $50,000 or $64,000 a year.

This time, with income of $30,000, Fabienne and Butch would be substantially better off using the Work Bonus (approximately $32,000 over five years). Once Fabienne’s income increases, the PBS becomes more and more attractive.

Case study: Ringo and Yolanda

Ringo and Yolanda are also married and are both Age Pension age. They both opt to continue working for 20 hours a week each for five years after reaching Age Pension age. They have few assets and no income other than their employment income.

Graph 3 compares:

• how much Ringo and Yolanda would qualify for if they registered for the Pension Bonus Scheme; and
• how much Age Pension they would receive, factoring in their Work Bonuses, if they earned $30,000, $50,000 or $70,000 a year between them. They each earn half the total income.

With both members of the couple earning $15,000 each ($30,000 combined) the Work Bonus-enhanced Age Pension again provides substantial advantage (approximately $48,000 over five years) over the PBS. Even earning $25,000 a year each, the PBS only just earns them more than the Age Pension.

Conclusion

Both the Work Bonus and the PBS have their advantages.

Aside from the actual amounts of benefit, there are other factors that may influence the situation, such as tax (the PBS is tax-free whereas the Age Pension may not necessarily be so) and longevity of the benefits (the PBS only accrues for five years, whereas the Work Bonus can continue longer).

Whether an individual or a couple are better off under the PBS or using the Work Bonus depends on their individual circumstances.

Assumptions in the graphs

• The single Age Pension plus pension supplement is $685.43 per fortnight (estimate as at September 20, 2009).
• The amount on which the single PBS bonus is calculated is $16,484 per year (estimate as at September 20, 2009).
• The Age Pension plus pension supplement for each member of a couple is $516.58 per fortnight (estimate as at September 20, 2009).
• The amount on which each member of a couple has their PBS calculated is $12,688 per year (estimate as at September 20, 2009).
• No indexation of pension amounts, the income test threshold or income earned is used.
• None of the subjects have their pension
• entitlement affected by assets.
• Each subject is assumed to have ceased work immediately before claiming the Age Pension when qualifying for the PBS.
• Tax is not taken into account.

Graeme Colley is national manager, technical services, at ING.