The best path to tread for maximum pension access

Most older Australians access some form of government pension and there are several key ways to maximise your access if you manage your affairs carefully.

When it comes to retirement, the ideal situation is to have enough assets to be self-funded and not to live off the public purse.

But for many, the age pension ends up being their primary source of income. Of the 4.2 million Australians who have stopped working, 42 per cent receive the full age pension and a further 20 per cent receive a part age pension.

The full age pension rate for singles is $29,754 per year and $44,855 for couples. In the past, the age pension was available from age 60 for women and 65 for men but over the past 30 years that has been increased to age 67 for both men and women.

In addition to the age criteria, there are asset and income tests to adhere to and whichever results in the largest pension reduction is applied.

As a rule of thumb, if you or your spouse are working, it is usually (but not always) the income test that is the prominent test. Whereas if you and your spouse are both retired, the assets test usually is the overriding test.

To get the maximum financial benefit, spend money on cost-saving measures such as water tanks.

Within the assets test, different thresholds apply depending on home ownership and relationship status. For instance, a retired homeowner couple can have up to $470,000 in assets and receive the full age pension, and a part pension up to $1,045,500 in assets, whereas a single homeowner can have up to $314,000 for a full age pension and up to $695,500 for a part pension.

There are a few things that you can consider to boost pension entitlement if you miss out on the age pension because of your level of assets or are in the part-pension range.

Family home

The family home is exempt as an asset as long as the land is less than 2ha, which means that spending money to upgrade, renovate or improve your home will reduce your Centrelink assessable assets. And to get the maximum financial benefit, money spent on cost-saving measures such as water tanks, solar panels and batteries has the additional effect of reducing utility costs.

Prepay for travel, charity, gifts

If you are planning overseas travel, and especially if it is a larger, more costly milestone birthday, prepaying flights, hotels and cruises will improve your asset position with Centrelink.

You are also allowed to give money to charity, family and friends but the limit is $10,000 per financial year and up to $30,000 over five years. Gifts in excess of these limits are known as deprived assets and still counted as an asset for five years.

If you are determined to give gifts, a tip to minimise the impact on your age pension benefit would be to do so before you turn 62. In other words, if you gift at 62, when you turn 67 you do not need to count the gift as an asset, regardless of how big it was.

That said, caution is required when gifting financial assets as it means that you have less resources available for the aged care transition.

Couple v individual

A common question is whether both people in a couple are assessed under the assets test if only one person is eligible for the pension.

The answer is yes; the assets of the younger partner are counted in the applicant’s assets test assessment.

However, you can use this rule to your advantage.

Superannuation

Superannuation accounts in the accumulation phase are not counted as a financial asset when the owner is less than 67 years old. As such, one strategy is to transfer part of the superannuation balance from the older spouse to the younger spouse to enhance eligibility under the assets test.

Consideration must be given to tax and how accumulation accounts get taxed at up to 15 per cent on income and gains whereas account-based pensions generally enjoy a zero per cent tax rate. You need to weigh up the extra potential Centrelink benefits versus the extra tax in the accumulation account.

Family trusts

And if you transfer assets into a family trust, expect heavy scrutiny as Centrelink is aware of its use to circumvent the assets test. You will be asked many questions, including who controls the trust and whether the distributions are discretionary or fixed in nature.

Overall, unless you completely remove yourself as a trustee of the trust, which has risks in itself, Centrelink is likely to see through the trust structure and still count the assets as being in your name.

Centrelink also employs advanced data matching technology with banks to monitor large or suspicious withdrawals. This means that an attempt to improve your assets test position by withdrawing funds from your bank account and holding it as physical cash is likely to trigger a ‘‘please explain’’ query from Centrelink.

Federal Budget changes

With 2.6 million people receiving an age pension and also getting the pension concession card, the age pension was budgeted by the government to cost $52.5bn last financial year – more than the budget for health ($50bn), defence ($48bn) and education ($45bn). And with personal income tax receipts totalling $300bn last financial year, it is easy to understand why many people believe it is their entitlement to receive the age pension after they retire, having contributed to the tax system their whole working career.

James Gerrard is principal and director of planning firm www.financialadvisor.com.au