Opinion
How can we work out how much pension we’ll get when we retire?
Paul Benson
Money contributorWhen we retire (about 10 years away), can you explain the basic tests that Services Australia will look at to determine if we get an age pension?
Services Australia, formerly known as Centrelink, provides the age pension to Australian citizens. Currently, once you reach 67, you are eligible to apply.
Knowing what you’ll have available to you in retirement isn’t always the easiest calculation.Credit: Simon Letch
Australia’s age pension system has a mechanism known as “means testing”, to ensure only those who need a pension receive one. There are two elements to this means test. An asset test, and an income test.
Services Australia will calculate your entitlement under both these tests, and then whichever produces the lower entitlement will be what you receive. Limits vary depending on whether you are a single or a couple, and whether you own a home.
Under the asset test, a couple who own a home will receive the full aged pension if they have less than $470,000 of assets, excluding the value of their home. They will receive a partial pension provided their assets do not exceed $1,031,000. This test includes all assets – financial assets of course, but also your car, caravan, furniture, etc.
Under the income test, a couple will receive the full pension if their income is below $372 per fortnight. They will receive a partial pension provided their income does not exceed $3737 per fortnight.
Services Australia use a simplifying process to determine the amount of income you earn from your financial assets. Rather than go to the trouble of ascertaining exactly what you earn on your various financial assets, including super, they apply a simple formula.
At present, that formula assumes you earn 0.25 per cent on the first $103,800 of assets you hold as a couple, then 2.25 per cent on the remainder of your assets. In the current interest rate environment these are oddly generous assumptions.
There are several good online calculators that could assist you in determining what you might be entitled to.
It’s worth flagging that a lot can change in 10 years. Between now and then I encourage you to accumulate wealth in superannuation. The tax concessions are generous, and you will have far more control of your destiny.
I have previously gifted my children the maximum allowable money over a five-year period without it affecting my pension. Can I do this again over the same period, and if so, do I need to report this to Centrelink? (I did so the first time.)
Thanks for your question. For those unfamiliar with the pension system, gifting rules apply to ensure people don’t subvert the intent of the means tests by transferring wealth to family members.
Pensioners can gift a maximum of $10,000 per year, and a combined maximum of $30,000 over a five-year period, without there being any negative impact on their pension.
You can certainly give away more than this if you wish, however if you do so, the excess will continue to be counted as an asset of yours for five years when determining your means testing.
Having provided gifts to your family within the allowable limits in the past does not preclude you from providing gifts in the future. Of course, you need to be sure that you aren’t leaving yourself short.
Provided your gifts are below the thresholds mentioned above, I am unaware of any reason why you would need to report these gifts to Centrelink. Gifts above the threshold, however, would have to be reported.
Paul Benson is a Certified Financial Planner at Guidance Financial Services. He hosts the podcast Financial Autonomy. Questions to: paul@financialautonomy.com.au
- Advice given in this article is general in nature and is 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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