How to avoid losing Centrelink pension benefits with a little rearranging
After a bumper year on sharemarkets, age pensioners who saw their super account grow in 2024 could be hit with a reduction in their age pension entitlement if nearing the asset test cap. While some strategies to reduce Centrelink assessable assets are well known, such as purchasing an annuity, now may be the time to also review the lesser known ones.
Unless you live on more than two hectares of land, your home is generally exempt from the assets test, as well as money spent renovating, improving and repairing your home. But what is less known is that if you sell your home and don’t immediately purchase a replacement one, the sale proceeds on the first home is exempt from the Centrelink assets test for 24 months, as long as your intention is to purchase another home.
The temporary exemption on sale proceeds applies even if the money is invested, rather than kept in cash. However, the income test and deeming rules will still apply. This exemption period can be extended up to 36 months if you are building a new home and the value of the new land is less than the amount you sold your old house for.
Most people will declare all funds left over after downsizing not realising that part of it could be exempt from the assets test. Money left over from the downsizing that you plan to use for renovations or repairs on the new property can be exempt for up to 24 months. Keeping evidence of the planned renovations and repairs is advisable, such as quotes, contracts and plans.
Although not pleasant to think about, a simpler move that requires a lot less commitment on the part of the pension phase investor is opportunity around funeral bonds. Certain funeral-related expenses are exempt from the assets test if paid now. For starters, if you want to go all out and have a mausoleum built, spending on that is exempt from the assets test, no matter how expensive it is. The same goes with crypts and burial vaults.
Funeral bonds up to $15,500 per person are also exempt, and any earnings on the bond is also exempt. Prepaying for your funeral is also exempt and there is no upper limit on the exemption. However, it is important to note that if you have both a funeral bond and prepaid your funeral, only the prepaid funeral cost is exempt from the Centrelink test and the funeral bond becomes an assessable asset.
Once you add the cost of potential mausoleum – or at least a premium casket, deluxe floral arrangement, venue hire, transportation costs, professional fees and other ad hoc funeral-related expenses, if you spend money to cover all these costs while you are alive, your asset test assessment could reduce by tens of thousands of dollars, which may result in an improvement in your fortnightly age pension entitlement.
Superannuation is another area that most people do not realise can be optimised to enhance age pension eligibility. While under the age of 67, money in the accumulation phase is exempt from the assets test. You may wonder why it is important, but if you are part of a couple and have assets near the asset test threshold, currently $470,000 for a full pension if you are a homeowner and $1,045,500 for a part pension, this can create a potential opportunity.
Say your assessable assets as a homeowner couple were $1,100,000 and included a mix of bank accounts, cars, contents and super pensions. Based on the assets test, no pension would be payable as assets exceed the maximum $1,045,500 threshold.
If one member of the couple is under 67, remembering that money in the super accumulation phase is exempt from the assets test, a decision can be made to optimise Centrelink benefits. The younger person could commute, say, $100,000 of their super pension back to the accumulation phase, and by doing that reduce Centrelink assessable assets by $100,000.
Under this example, the older person in the couple goes from not being eligible for the age pension as assets of both people are assessed, to getting a small part pension as well as picking up the pension concession card, which can be worth thousands of dollars a year in benefits.
The disadvantage of this strategy is that the money commuted from the super pension is leaving a tax-free account and moving to one that will now be taxed at up to 15 per cent on earnings and gains.
Weighing up the additional Centrelink benefits versus the additional super tax is important to decide whether this strategy works for you. And of course, once the younger person reaches 67, all their super benefits will be counted again as an assessable asset, so this is only a temporary strategy.
If you are not sure about how these arrangements may apply to your specific situation and whether it would improve your age pension entitlement, Centrelink has a dedicated team of specialists who can run through your specific situation and give advice about your age pension entitlement. This is the Centrelink financial information services section and by ringing Services Australia, you can arrange a video chat appointment with a financial information services officer.
James Gerrard is principal and director of planning firm financialadviser.com.au
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