Understanding Australia’s Age Pension income tests
Australia’s Age Pension is intended to protect seniors from living in poverty if they have no resources of their own to use. However, the amount of Age Pension payable is reduced from the full rate if the senior has assets or other income above certain levels.
Pension means tests are rules for determining any reduction in your Age Pension payment rate. Centrelink will assess you against the asset test and then against the income test. The means test that reduces your Age Pension rate the most is the test that will be applied.
That is, the test that hits you the hardest will be used.
The Age Pension income test
The income test allows for your Age Pension payment to be reduced by 50 cents for every dollar of your income above your income test allowance. There are annual increases, it’s worth knowing what they are—see the Centrelink website.
The Age Pension payment for each member of a ‘couple at Centrelink’ is reduced by 25 cents for each dollar that the total combined income of the couple exceeds the couples’ income test allowance. Again, this can change, check with Centrelink.
You must be entitled to at least a dollar a fortnight of the Age Pension to remain an age pensioner. That means that if you have substantial income, you could be excluded from the Age Pension and also be ineligible for the pensioner concession card—which is a valuable, cost-saving card to have.
Assessable income for the Age Pension income test
At Centrelink, ‘assessable income’ has a special definition for the Age Pension income test.
This test includes most of the payments you receive into your bank account together with the value of any additional benefits from your employer.
But the ‘deemed financial income’ of your financial assets is used rather than the actual interest and dividends you received.
The income test impact on a single senior
Sally has about $30,000 of financial assets generating a deemed income of $20 per fortnight or $520 per year. Sally has no other income so she’s well below the single person’s income allowance of $172 per fortnight and the income test doesn’t impact her.
But then Sally starts working two short days a week in her sister’s cake shop. Sally is paid $420 a fortnight for her work, which she reports to Centrelink. Sally now has a total assessable income of $440 per fortnight.
Centrelink informs Sally that under the income test her Age Pension will be reduced by $134 per fortnight.
Her total fortnightly assessable income is $440, but her fortnightly income allowance is only $172. Thus Sally’s assessable income exceeds the Income Allowance by $268 per fortnight, $440 less $172.
That means that her income test reduction is calculated as 50% of $268, that is, $134 per fortnight.
Sally is happy with this decision because she enjoys helping her sister and meeting the customers in the cake shop. In addition, she’s ahead by about $280 per fortnight.
Income test impact on a senior couple.
Mike and Mary have substantial financial assets that generate a deemed financial income of $760 a fortnight. They have no other sources of income so their assessable income is $760 per fortnight.
The income test allowance for couples increased to $304 per fortnight from July 2018.
Thus Mike and Mary have an excess income of $760 less $304, that is, $456 a fortnight. The income test reduces the combined Age Pension entitlements of Mike and Mary by 50% of their excess income, that is, by $228 per fortnight for the couple.
Centrelink has already calculated that the asset test would reduce the combined Age Pensions for Mike and Mary by $200 per fortnight.
Then Centrelink checked their situation and found that the income test would yield a bigger reduction than the asset test. So the income test will be now applied to Mike and Mary. When the income test was applied, Mike and Mary’s Age Pension rates were cut by $114 a fortnight.
As a couple living together Mike and Mary receive the same amounts of Age Pension paid into their individual bank accounts each fortnight.
Annual adjustments to income test allowances
The Age Pension income test allowances are reviewed each year with a small increase usually applied each July. The last increase in the income test allowances for couples and singles was by $4 per fortnight effective from July 2018.
You can find more on this and other Centrelink topics at https://financialcareservices.com.au.
The figures shown here were correct at the time of writing.
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.