Record numbers of Australians are retiring and are seeking retirement income planning advice. A key component to retirement income is the Age Pension.
While I’ve written an article discussing the basics of applying before, it’s worth digging deeper into the mechanics of how the pension works.
The application forms for the Age Pension are extensive, split into two main booklets, with many ancillary forms also possible. Means-testing is a major part of the assessment of your entitlement, so the forms aim to capture information about every aspect of your financial situation. As daunting as they may appear, it is often the case that many of the questions have simple “no” responses and can be moved past quickly.
Centrelink claims assessors use the information provided on these forms to assess your financial situation against two tests:
- the Income Test; and
- the Assets Test
Some aspects of your financial situation are income (such as part time employment and foreign pensions). Some aspects of your financial situation are assets (such as your car and holiday home). Finally, some aspects of your financial situation count under both tests (such as bank accounts, superannuation and shares). Those that count under both tests are simply because they both have an asset value, and provide an income (interest, dividends etc).
Once all of your assets and income information is loaded into their system, both the Income Test and the Assets Test are applied. Whichever test results in the lower rate of Age Pension is the one that is applied. That is, your pension can only ever be paid under the Income Test OR the Assets Test, not both. Some pensioners are Income-Tested pensioners, and others are Assets-Tested.
If neither your income or your assets are sufficient enough to impact the pension, you will receive the maximum Age Pension. If either your income or your assets exceed the upper cut-off limit, you will receive no Age Pension.
The various limits for the Income and Assets Tests change regularly through indexation and can be found here. Your marital status and homeownership status are important to work out which limits apply to you. If you own your home, it is important to remember that it does not count as an asset, it is 100% exempt.
There are many complexities to applying the Income and Assets Test. We regularly perform calculations with our retiring clients so that they have an idea on what level of support they can expect from the government. From there, we can consider strategies to maximise the entitlement (we wrote about this in this article).
Understanding how the pension works, how to maintain it and your obligations are important. Unfortunately, Centrelink themselves are not necessarily in a position to advise prospective applicants of their entitlements and other critical information, as they are busier than they ever have been before. That means it falls to the various online calculators and resources, and those of us in the financial planning industry to assist in guiding you through the process. Contact us today to understand whether or not the Age Pension will be part of your retirement income.
