Can your account-based pension affect your eligibility for the Age Pension?
When it comes to enjoying a fulfilling retirement, it helps to have a retirement income stream that enables you to live comfortably. For many, this income can come from a number of sources, including super and the Age Pension.
However, there are instances when drawing an income from your super can affect your eligibility for the Age Pension. By understanding the rules and planning ahead, you’ll be in a better position to maximise your income during retirement. But first, let’s recap on the basics:
What is an account-based pension?
An account-based pension (or allocated pension) is one of the types of pensions you can use to access your super. It’s a regular income stream you draw from your own super savings once you satisfy a condition of release, such as when you reach your preservation age and retire. Your preservation age is between 55 and 60, depending on when you were born.
To start an account-based pension, you transfer a lump sum from your super into a pension account. Then, you have the flexibility to determine:
- the size of your payments – while typically there’s no maximum on how much you withdraw, there are requirements for minimum withdrawal amounts. This amount is calculated based on your age and will be a percentage of your account balance.
- the frequency of your payments – you can elect to receive your payments on a monthly, quarterly, half-yearly or annual basis. These payments continue until the balance of your super savings runs out.
Typically, pension payments are tax free if you are aged 60 and over.
What is the Age Pension?
The Age Pension is a payment from the government to eligible, older Australians to provide income support during retirement. Not everyone is eligible to receive the Age Pension. To receive it, you need to meet Australian residency requirements and also reach Age Pension age, which depends on your date of birth. The qualifying age will gradually increase by six months every two years, to 67 years by 1 July 2023.
The amount you’ll receive will depend on whether you’re single or a couple, as well as the outcome of the income test and asset test. The higher your income and the value of your assets, the less money you’ll receive.
How do account-based pensions impact the Age Pension?
Account-based pensions are an income-producing asset, which means they form part of both the income test and the asset test used to determine your eligibility to receive the Age Pension.
Centrelink treats the entire balance of your account-based pension as an ‘asset’ under the Age Pension asset test, regardless of when the pension started.
However, for the income test, the amount assessed will depend on when you started your pension as follows:
- If you started your account-based pension on 1 January 2015 or after, Centrelink will treat your account-based pension as a financial investment and it will be subject to the income test based on deemed income (see below).
- If you started your account-based pension before 1 January 2015, Centrelink’s treatment of your account-based pension will depend on whether the pension is ‘grandfathered;, in which case only a portion of the annual income payments may be counted.
When do grandfathering rules apply?
There are two conditions that need to be met for grandfathering rules to apply:
- You started receiving an account-based pension before 1 January 2015
You’ve also received the Age Pension (or the Department of Veteran Affairs pension) since 31 December 2014.
- If you meet these conditions, then your assessed income will be considered the gross payment you receive from your account-based pension, minus an amount which reflects your capital returns.
However, if you don’t meet these conditions, then Centrelink will use deeming rules (a set of rules used to work out the income created from your financial assets) to calculated how much ‘deemed income’ will be included in the test.
The deeming rules and rates will differ depending on your circumstances. For example, if you’re single, the first $51,800 of your financial assets has the deemed rate of 0.5% applied. Anything over $51,800 is deemed to earn 2.5%.
Considerations when planning for retirement
The rules, calculations and tests for the Age Pension can be complex and confusing, so it’s always a good idea to seek financial advice when planning retirement income streams. Speak to Centrelink, or to your financial adviser to find out more about how your income may affect your eligibility for the Age Pension.
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