Why does my friend get a bigger age pension than I do?

I am 69 years old and have a defined benefit pension which pays me $2250 a month and will continue to do so (with indexation) until I die. I own my home with no mortgage and no savings to speak of. I receive $730 per fortnight from Centrelink. My acquaintance owns his home. He draws about $2000 per month from his superannuation account (not defined benefit, and I don’t know how large the lump sum is), which will last until he is about 85, in 10 years’ time. He also receives a small UK pension each month.

Yet, he receives over $1000 per fortnight from Centrelink, and will obviously receive full Centrelink once his super runs out. Why does he get so much more than me in Centrelink allowance now, when our super income per month is similar?

It may seem like your friend is getting a better deal, but you’ll be better off in the long run.Credit: Simon Letch

Age pension entailments are derived from the application of an asset test and an income test. Centrelink will determine your pension entitlement under both tests, and then use the lower of the two figures to arrive at your fortnightly pension payable.

While I can certainly appreciate your logic in comparing the amount of income you are receiving from your defined benefit pension with the drawings he is making from his superannuation savings, these two retirement income sources are treated very differently from Centrelink’s perspective.

Because some of the money your friend draws each month is simply the return of his own capital, the $2000 per month drawing is not used for income test purposes.

Depending on when he began his income stream there are two potential ways his income will be counted, but for now, it is sufficient to know that the treatment of your income and his is quite different.

Hopefully you can console yourself in the knowledge that later in life you will be in a far better position than him.

This does make some sense because as you have noted, your income never runs out, and in fact rises with inflation over time. Your friend’s pension, however, is drawing down on a principal sum, and will run out provided he lives long enough.

I suspect you are getting assessed under the income test, whereas your friend is being assessed under the asset test. For no reason that I have ever been able to discern, it does seem that the asset test is a little more generous than the income test.

Your defined benefit pension is a fantastic retirement benefit, one that is tough to find these days. Hopefully you can console yourself in the knowledge that later in life you will be in a far better position than him.

What does “hedged” mean? One of my investments uses this term.

This will relate to an investment in overseas assets, most likely shares. Many investment funds offer a “hedged” and an “unhedged” version.

The hedged version takes out a form of insurance that removes the impact of movements in the Australian dollar relative to another currency, most commonly the US dollar.

The unhedged version doesn’t undertake this measure, and so the performance of your investment will be determined by two things, the change in value of the underlying investment, and any change in the exchange rate.

When the Australia dollar falls, your overseas assets become worth more. When the Australian dollar rises, it has the opposite impact. Therefore, if you had a crystal ball, and the cost of switching between hedged and unhedged was zero, you would hold the hedged version in a rising exchange rate environment, and be unhedged when the AUD is falling.

Paul Benson is a certified financial planner at Guidance Financial Services. He hosts the What’s Possible? and Financial Autonomy podcasts. Questions to: [e-mail]

• Advice given in this article is general in nature and not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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