Understanding superannuation and the Age Pension means tests
In Australia, once you retire, you’re expected to access your superannuation to at least partly fund your living expenses in retirement. That means your superannuation is assessed as part of your financial resources to determine how much, if any, Age Pension you could collect.
If you’re employed, during your working life your superannuation is in its ‘accumulation phase’. Your employer pays the compulsory Superannuation Guarantee Contributions into your superannuation fund account.
Over time, your superannuation fund account balance should grow from both the input and as investment earnings accumulate.
After retirement, your superannuation moves into the ‘drawdown phase’ as you start taking money out to pay for your living expenses.
If you’ve accrued what is known as a retirement pension, usually from working in the public sector, then you’ll be receiving your superannuation in fortnightly instalments for your lifetime.
In contrast, most Australians accumulate superannuation entitlements that could be paid as a lump sum on retirement. These retirees can choose how fast they take their money out of superannuation.
For instance, when you retire you may take all your superannuation as a lump sum to spend or invest as you choose. If you’re on the Age Pension and cash out your superannuation, you won’t have any superannuation to report to Centrelink.
When you reach the drawdown phase, all superannuation accounts are part of the Centrelink means testing for the Age Pension.
Accumulating superannuation accounts are financial assets
Seniors who continue working beyond Age Pension age can choose not to take any superannuation benefits until aged 75. Seniors still actively employed in the workforce, at any age, will continue to have a superannuation account in accumulation phase. They will be collecting ongoing Superannuation Guarantee Contributions from their employer.
Once you attain your Age Pension age any superannuation accounts still in the accumulation phase will also be counted as financial assets.
However, if you have a younger partner who is still in the accumulation stage, their superannuation will be excluded from means testing for your Age Pension until your partner reaches Age Pension age.
Allocated pension accounts and retirement income streams are financial assets
Retirees with large amounts of accumulated superannuation often choose to have it released slowly from an allocated pension account (an allocated account allows you to set up an income stream from your superannuation for your retirement). You can do this before you reach the Age Pension age even if you’re still active in the workforce.
Your allocated pension account could be held in a Self-Managed Superannuation Fund, an industry superannuation fund or a public offer superannuation fund. At Centrelink, allocated pension accounts are also called personal retirement income streams.
A law change in 2015 means your allocated pension account is a financial asset when you apply for the Age Pension. If you have a partner, your partner’s allocated pension account will also be included in your financial assets even if your partner is under Age Pension age.
Thus the value of all of your allocated pension accounts and your accumulating superannuation accounts will be counted as financial assets. Any ongoing superannuation accounts will contribute to your deemed financial income for the Age Pension Income Test.
Defined benefit non-commutable superannuation pensions
In the past, public sector workers accrued retirement pensions. Many retired public servants, teachers and utility service workers still benefit from fortnightly pensions that increase as the cost of living increases. Upon death, these public sector retirement pensions partially revert to a surviving partner.
A few seniors have purchased superannuation pensions from their Self-Managed Superannuation Funds. But very few private superannuation funds pay pensions that comply with the Centrelink rules about no lump-sum cashouts ever.
If you can’t commute your retirement pension for a lump sum, then it’s excluded from the Asset Test assessment.
A retirement pension that can’t be traded for a lump sum counts as income for the Age Pension means tests. Centrelink updates your income amount each time an indexation increase is applied to your retirement pension.
If you’re required to meet part of the cost of your superannuation pension by making regular member contributions, you might be able to get a discount on the pension amount for the Age Pension Income Test.
The maximum discount is 10% of the superannuation pension paid where you contributed at least 10% of the cost of a pension accrued as a civilian—different rules apply for pensions payable to those who have served in the Australian military.
If you aren’t sure what to do, contact Centrelink direct.
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.