There are many benefits to receiving a pension or even a part pension, but there are limits to what level of income or assets you can have to be eligible.
Regarding assets, the key limits as at 1 July 2019 are as follows:
To receive a full pension, assets (excluding the value of the primary residence) must be less than:
Indexed every 1 July. Source: Australian Government Department of Human Services
To receive at least a part of a pension, assets must be less than:
|Couple – separated by illness||$1,017,000||$1,222,500|
Indexed every 20 March, 1 July and 20 September. Recipients of Rent Assistance will have higher thresholds. Source: Australian Government Department of Human Services
There are a number of strategies that can be used to reduce asset levels, which can result in qualifying for a part pension or increasing the current pension amount received.
However, before reducing your assets it is important to bear in mind whether your remaining savings can support any shortfalls in retirement income needs, as any increased pension amount may still be inadequate. Personal circumstances can also change and increase the reliance on your reduced savings. For example, future health issues may require a move into aged care, which can bring increased expenses.
With that in mind, here are six assessable asset reduction strategies:
1 – Gift within limits, or more than 5 years before qualifying age
If there is a desire to provide financial assistance to family or friends, gifting can reduce your assessable assets. The allowable amounts a single person or a couple combined may gift is $10,000 in a financial year or $30,000 over a rolling five financial year period. Any excess amounts will continue to count under the asset test (and deemed under the income test) for five financial years.
If you are more than five financial years away from reaching your age pension age or from receiving any other Centrelink payment, you can gift any amount without affecting the eventual assessment once you reach Aged Pension age.
2 – Homeowners can renovate
Your home is an exempt asset and any expenses paid to repair or improve it will form part of its value and will also be exempt from assets testing.
3 – Repay debt secured against exempt assets
Debts secured against exempt assets do not reduce your total assessable assets. An example is a mortgage against the family home. However, using assessable assets to repay these debts can reduce asset levels. Crucially, you must make actual repayments; depositing or retaining cash in an offset account will not achieve this outcome.
4 – Funeral bonds within limits or prepay funeral expenses
If you wish to set aside funds or pay for your funeral costs now, there are a couple of ways to do this and reduce your assessable assets.
A person can invest up to $13,250 (as at 1 July 2019) in a funeral bond and this amount is exempt from testing. Members of a couple can have their own individual bond up to the same limit each. By contrast if a couple invests jointly, this must not exceed $13,250, not double the limit.
In comparison, there is no limit to the amount paid for prepaid funeral expenses. For the expenses to qualify there must be a contract setting out the services paid for, state that it is fully paid, and must not be refundable. Importantly, both methods of paying for funeral costs are designed purely for this purpose preventing assets being accessed for any other reason.
5 – Contribute to younger spouse’s super and hold in accumulation phase
If you have a younger spouse who has not yet reached their age pension age and is eligible to contribute to super, contributing an amount into their account may reduce your assessable assets. The elder spouse can even withdraw from their own superannuation, generally as a tax-free lump sum, to fund the contribution.
Investments held in the accumulation phase of superannuation are not counted towards their assessable assets if the account holder is below the pension age. Before using this strategy any additional costs incurred should first be considered. Holding multiple superannuation accounts may duplicate fees. Shifting funds into an accumulation account may increase the tax on the earnings on these investments to 15%. Alternatively, earnings on the funds are tax-free if invested in an account-based pension or potentially even personally.
Additionally, contributing to a younger spouse who is under age pension age who is still working will ‘preserve’ the funds. They should also ensure they do not exceed their contribution caps.
6 – Purchase a lifetime income stream
Lifetime income streams such as an annuity purchased after 1 July 2019 may be favourably assessed, according to the Social Services and Other Legislation Amendment (Supporting Retirement Incomes) Bill 2018. Where eligible, only 60% of the purchase price is assessed. This drops to 30% once you reach the later of, age 84 (based on current life expectancy factors) or five years.
To receive concessional treatment, the lifetime annuity must satisfy a ‘capital access schedule’ which limits the amount that can be commuted voluntarily or on death.
Reducing your assessable assets within the relevant assets test threshold can provide many benefits such as increasing your existing pension or allowing you to qualify for a part pension if you were above the upper threshold.
While it is tempting to intentionally reduce your asset levels to gain these benefits, it is important to remember the payment rate is determined by applying both an income and assets test. The one that results in a lower entitlement determines the amount payable. If the income test is the harsher test, reducing your assessable assets may provide no benefit.
If the assets test is harsher, you should not lose sight of the fact that any reduction in your assets means there are fewer assets for you to call upon if required.