The little-known trick to boost your age pension entitlements

Homeowners receive significant tax and pension advantages over renters, and some retirees have found ways to maximise their Centrelink benefits.

Homeowners get a better deal in the tax and social security system than renters. Picture: Supplied

An interesting quirk of our tax and social security system is that homeowners are given a leg up over renters in what some may view as an unfair advantage.

There is no capital gains tax payable on the sale of a principal place of residence, no matter how large the increase in value is. Whereas, rentvesters – people who rent where they want to live and invest in property to build wealth – are subject to capital gains tax rules if they sell an investment property.

When it comes to Centrelink, homeowners also get a better deal. When assessing eligibility for the age pension under the assets test, the value of the family home is exempt unless it is located on more than 2ha of land. Renters on the other hand, get no equivalent exemption, although they do get a slightly higher assets test allowance.

If you are wanting to maximise your Centrelink age pension entitlement, using the home exemption to your advantage is one potential pathway whereby you concentrate your assets in the value of your home and thereby increase your age pension entitlement.

Centrelink’s age pension pays single retirees up to $30,646 per year and couples up to $46,202 per year. In terms of the value of assets you can have before the full age pension entitlement is affected, single homeowners can have assets worth up to $321,500, while couples can have assets to the value of $481,500.

As the family home is exempt as an asset, regardless of its value, it does not matter if your home is worth $500,000 or $5m – it will still be exempt. In addition, there is no upper threshold on how much the family home can be worth and still be eligible for the assets test exemption.

This is where the home ownership strategy can be triggered: you sell your current home and upgrade to a more expensive home, drawing on super and cash savings to fund the difference. In doing so, you have intentionally, but legally, reduced your assessable assets and improved age pension eligibility.

As an example, If a single pensioner owns a $1m home, has $800,000 in super, owns a $20,000 car and has $30,000 in the bank, their assets test assessment is $850,000. This is above the maximum threshold for a part pension of $714,500 and as such, no age pension would be received. The retiree would need to live off the drawdowns from their superannuation account, which at an assumed 7 per cent earnings rate, would be $56,000 per year.

The home ownership strategy can be used to improve age pension eligibility. Picture: Max Mason-Hubers/NewsWire

However, if the retiree decided to target an age pension strategy at any cost, they would sell their $1m home, netting approximately $965,000 after advertising, agent fees and legals, and then purchase a new home for say $1.45m. Stamp duty and legals would be about $70,000, taking the total purchase cost $1.52m.

To fund the gap, the retiree would withdraw $555,000 from their super account, reducing the balance to $245,000. Adding the car and bank account value, the retiree now has $295,000 in assessable assets and qualifies for the full age pension of $1178 per fortnight.

This is where things get interesting. Before the home sale, the retiree’s annual income would be $56,000 from super. There was no age pension entitlement and the only government benefit would be a Commonwealth Seniors Health Card.

After the home upgrade, their annual income is affected, but not by too much. The 7 per cent annual super drawdown reduces to $17,150, but there is now a $30,646 per year government age pension which is guaranteed for life and increases each year with inflation.

Retirement income reduces to $47,796, which is only $8204 less than before, but this gap closes further after the pension concession card is factored in, which can be worth thousands per year. An alternative approach would be to renovate the existing $1m home, rather than upgrading, which has the benefit of avoiding transaction costs such as stamp duty and agent fees.

Another approach to boost age pension entitlement is the gifting strategy. You can gift up to $10,000 per year, and up to $30,000 over five years. Anything above these amounts will be counted as a ‘deprived asset’, meaning Centrelink still counts the excess gift as an asset for five years.

The trick is to gift assets such as cars, boats, caravans and cash to family members (potentially as an early inheritance) before the age of 62, meaning that once you serve out the five-year deprived asset period, you are approaching the age of 67 and can apply for the age pension with a clean slate. In other words, the gift no longer counts as an asset.

For some people, the age pension is not just a benefit, it is an entitlement and they will do whatever it takes to get it. But there are significant risks if you drawdown on super and cash to achieve this. What if major costs occur in the future, such as unplanned medical costs or property repairs? You may actually wipe out your remaining retirement savings, leaving you in a precarious financial position and be worse off than before.

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