Understanding Australia’s Age Pension: Deemed income from financial assets
The Age Pension income test uses your ‘deemed’ financial income rather than your actual income from your financial assets. Deeming assumes your assets will earn a set rate of income, no matter what they really earn and is part of the income test used to work out income support for Aged Pensioners.
The calculation of deemed financial income is based on the current Centrelink formula regarding the value of your financial assets. Understanding how this works begins with understanding a three-step process. The examples at the end help to illustrate how it works.
Step 1—are you a ‘member of a couple’ or not?
The first step is to work out if you’re a single person or a ‘member of a couple’ (as Centrelink calls it). A member of a couple can be married; in a registered relationship; or in a de facto relationship. You will find more information here about what constitutes a couple here.
As a couple, you must use the total value of both your financial assets in the ‘couples’ formula for the deemed financial income calculation.
If you’re single, then you use the amount of your own financial assets in the single, non-partnered formula for the deemed financial income calculation.
Step 2—determine the value of your financial assets
Remember, Centrelink will count as yours any assets that you have a beneficial interest in. This will include those you hold in a private company or trust structure together with any inheritances that could now be paid to you.
Your financial assets at Centrelink include those easily recognised as financial investments, such as bank accounts, units in managed funds and listed securities such as shares, option contracts and debentures.
Your financial assets will include any holdings of gold bullion or other precious metals, many life insurance policies, most superannuation account balances and some funeral bonds. Centrelink also counts ‘excess gift amounts’ as financial assets for five years from the date of the gift.
Step 3—calculate your annual rate of deemed financial income
Effective from July 2018, the lower interest rate applicable to the first portion of any financial asset is 1.75% and the higher interest rate is 3.25%. The changeover capping the first portion of financial assets is $51,200 for a single Age Pensioner and $85,000 for an Age Pensioner couple at Centrelink.
Thus, for a single person, the annual rate of deemed financial income is calculated as 1.75% of the first $51,200 of financial assets plus 3.25% of any additional financial assets.
Consider Betty, a single Age Pensioner who has $84,000 of financial assets. Betty’s annual rate of deemed financial income is calculated as: 1.75% of $51,200 plus 3.25% of ($84,000 less $51,200—that is, $32,800).
That is, 1.75% of $51,200 plus 3.25% of $32,800 which is $(896+1,066) totalling $1,962. So $1,962 is Betty’s annual deemed financial income per year from her assets.
For a couple at Centrelink, the annual rate of deemed financial income is calculated as 1.75% of the first $85,000 of financial assets plus 3.25% of any additional financial assets.
Consider Anne and Albert a couple at Centrelink who also have $84,000 in financial assets. The annual rate of deemed financial income for Anne and Albert is 1.75% of $84,000, that is, $1,470.
Centrelink calculates the deemed financial income for Age Pensioners based on asset and income details you submit. Your deemed financial income amount will be recalculated whenever deemed interest rates change or asset levels change.
Christine Hopper is the Director of Financial Care Services, an independent financial advisor.
Financial Care Services is focused on mature people considering a change of lifestyle including retirement and particularly new living arrangements in: retirement lifestyle community villages; granny flats; supported or assisted living; and Commonwealth regulated aged care. She can be contacted through https://financialcareservices.com.au.
Christine talks to Centrelink as a customer receiving a Carers Allowance and on behalf of clients. She understands the range of Department of Veteran Affairs and Centrelink income support benefits, their relevant means tests and eligibility conditions. She’s an actuary who also holds a Bachelor of Science, a Diploma of Financial Planning and a Certificate of Theology.