One of the most read articles in 2021
10 little-known pension traps proving the value of advice.
1.Additional income
Most wealthier pensioners are asset tested, yet emails keep asking if it’s okay to earn some more
money. Of course, it is – the income test is not relevant if you are asset tested. A couple with assets
of $800,000, receiving a pension of $136.80 a fortnight each, could have assessable income of
$68,000 a year including their deemed income, and employment income, without affecting their
pension because they would still be asset tested.
2.Valuing assets
Your own home is not assessable, but your furniture, fittings and vehicles are assets tested. Many
pensioners fall into the trap of valuing them at replacement value. This could cost them heavily
because every $10,000 of excess assets reduces the pension by $780 a year. Make sure these assets
are valued at garage sale value, not replacement value. This puts a value of $5,000 on most people’s
furniture and older furniture these days has very little resale value.
3.Don’t spend just to increase pension
There is no penalty for spending money on holidays, living expenses and renovating the family
home, but don’t do this just to increase your pension. Think about it. If you spend $100,000
renovating your home your pension may increase by just $7,800 a year, but it would take almost 13
years of the increased pension to get the $100,000 back. Of course, the benefit of money spent
should be taken into account too – money on improving your house or travelling could have huge
benefits for you. The main thing is not to spend money with the sole purpose of getting a bigger age
pension.
4.Revaluations
Each year on 20 March and 20 September, Centrelink values your market-linked investments, such
as shares and managed investments, based on the latest unit prices held by them. These
investments are also revalued when you advise of a change to your investment portfolio or when
you request a revaluation of your shares and managed investments. If the value of your investments
has fallen, there may be an increase in your payment. If the value of your investments has increased,
then your payment may go down.
The rules are in favour of pensioners. If the value of your portfolio rises because of market
movements, you are not required to advise Centrelink of the change. It will happen automatically at
the next six monthly revaluation. However, if your portfolio falls you have the ability to notify
Centrelink immediately.
5.Gifting
You can reduce your assets by giving money away but seek advice. The Centrelink rules only allow
gifts of $10,000 in a financial year with a maximum of $30,000 over five years. Using these rules, you
could gift away $10,000 before June 30th and $10,000 just after it, and so reduce assessable assets
by $20,000.
6.Superannuation
There is devil in the detail. If a member of a couple has not reached pensionable age, it’s prudent to
keep as much of the superannuation in the younger person’s name because then it is exempt from
assessment by Centrelink. However, the moment that fund is moved to pension mode, it’s
assessable irrespective of the age of the member.
7.Mortgaged assets
A common trap is when a loan is used to purchase an investment property with the loan secured by
a mortgage against the pensioner's own residence. The debt against an investment asset is only
deducted from the asset value if the mortgage is held against the investment asset. If the mortgage
is secured against an asset other than the investment asset, the gross amount is counted for the
assets test and the loan is not deducted. The effect on the pension could be horrendous.
8.Family trusts
Family trusts can cause problems with both income and assets tests for the age pension. Thanks to
the information sharing and matching abilities between Centrelink and the ATO, you can bet that
Centrelink will know if a family trust is involved in your affairs.
Even if you have a high-risk child (such as a child with a relevant disability) who makes Mum the
appointer or default beneficiary for asset protection and there is no ‘pattern of distribution’, Mum
could be caught.
It’s a complex topic. If there is a family trust somewhere in your financial affairs, it is suggested that
you take expert advice long before you think about applying for the age pension. It may pay big
dividends.
9.Bequests
Bequests are another trap. There is a big difference between the asset cut-off point for a single
person and that for a couple. As at 20 September 2021, the single homeowner cut-off point was
$593,000, whereas for a couple it was $891,500. Many pensioner couples make the mistake of
leaving all their assets to each other, which can cause a lot of extra grief when the surviving partner
finds they have lost their pension as well as their partner.
An example Jack and Jill had assessable assets of $740,000 and were getting around $11,800 a year
in pension. Jack died suddenly and left all his assets to Jill. This took her over the assets test limit for
a single person and she lost the pension entirely. Had he left the bulk of his estate to their children
she would have been able to claim the whole pension plus all the fringe benefits.
10.Jointly owned assets with adult children
A wrong decision in the past can have serious consequences in the future. Think about a couple aged
52 who want to help their daughter into her first home. Without taking advice, they bought a 50%
share of a house worth $400,000 so that the daughter could obtain a loan. Fast forward 15 years
when the house is now worth $900,000 of which their half share is $450,000.
Their other financial assets were worth $600,000 so they believed they would be eligible for a part
pension. To their horror they discover that their equity in the daughter’s home of $450,000 took
them over the assets test cut off point. If they transferred their share to the daughter the capital
gains would be $225,000 after discount, on which capital gains tax could well be at least $80,000.
Furthermore, they would have to wait five years to qualify for the pension because Centrelink would
treat the $450,000 as a deprived asset for the next five years. The total value of the CGT payable and
the pension lost could be at least $150,000. If they had been aware of the trap, or taken advice, they
could have gone guarantor for their daughter, possibly putting up their own home as part security
and this would have had no effect on the future pension eligibility.
This article is general information and does not consider the circumstances of any individual.
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