The Age Pension is a critical part of retirement income for many Australians, but understanding how it works can be difficult. The government provides lots of information on the Services Australia website however navigating the information can be overwhelming.
In this guide we explain how the system works in an easy-to-understand format. We also share with you some tips on how you can maximise your Age Pension entitlement.
What is the Age Pension?
The Age Pension is a government payment that supports senior Australians. To qualify, you need to meet specific criteria, including reaching the required pension age (currently age 67) and passing both income and asset tests. These tests ensure that the Age Pension is provided to those who need it most.
How much can you get?
There are different rates of Age Pension payments for single people and couples. The maximum level of pension you can get is updated regularly to account for changes in the Consumer Price Index (CPI). To get the latest rates, check out Services Australia: How much you can get.
The Age Pension comes with several supplements designed to assist with the cost of living. The rates are indexed regularly to account for inflation, and the supplements include payments for essentials like energy bills and living expenses. If you’re a renter, you may also qualify for Rent Assistance.
Your level of payment may reduce as a result of the income and asset tests (discussed below). Payments are typically made fortnightly.
Means Testing: Income and Assets Tests
Assuming you have reached the qualifying age, your level of Age Pension will be determined by income and asset tests.
- Income Test – This assesses how much income you receive from various sources, such as employment, other pensions (i.e. UK Pensions) and deemed income.
- Asset Test – This looks at the value of what you own, including property investments, and other assets. There are some assets which are exempt from the test such as your family home.
Every person is subject to both tests and the government will apply the test which gives you the lowest entitlement.
Both the income and assets test have a lower threshold and an upper threshold. If you are below the minimum threshold, you will get the maximum entitlement. If you are above the minimum threshold but below the maximum threshold, you will get a partial entitlement. If you are above the maximum threshold, you aren’t eligible.
The thresholds are updated regularly. For the latest figures, see Services Australia: Assets test and Services Australia: Income test.
Deeming and the Income Test
Centrelink uses “deeming” to estimate how much income your financial assets are generating. Rather than looking at actual returns, Centrelink applies a set deeming rate, meaning they assume your investments are earning a specific amount, regardless of what they truly earn. This affects your eligibility for the pension under the income test.
For the latest deeming rates, see Services Australia: Deeming.
Work Bonus scheme
For those who are still working in retirement, the Work Bonus can allow you to keep more of your pension. This scheme lets you earn a certain amount of income without it being counted under the income test. If you don’t use your full allowance, the unused amount rolls over, potentially allowing you to earn more later on without impacting your pension.
For the latest Work Bonus balance, see Services Australia: Work Bonus.
Always keep Centrelink informed
It’s essential to notify Centrelink of any changes to your financial situation or personal circumstances. This ensures you’re receiving the correct amount of Age Pension. Failure to do so may result in overpayments, which you could be required to pay back.
The easiest way to stay on top of your reporting obligations is by linking Centrelink to your MyGov.
Strategies to maximise the Age Pension
If your income or assets are too high to qualify for a full pension, there are strategies you can consider to reduce your assessable amounts. Some of these include:
- Upgrading your home – Your principal residence is exempt from the assets test, so spending more on your home can reduce your assessable assets. This will also leave you with less income to be deemed under the income test.
- Gifting – You can gift $10,000 in one financial year and up to $30,000 over 5 financial years. If you exceed these limits, the excess amount will continue to count towards the income and assets test for 5 years from the date of the gift.
- Funeral bonds and prepaid funerals – Investing in a funeral bond or a prepaid funeral can reduce assessable assets. Certain limits apply.
- Contributing to a younger spouse’s super – If your spouse is younger than Age Pension age, contributing to their superannuation can reduce your assessable assets as funds held in accumulation account are not included in the income or assets test until the owner reaches Age Pension age.
- Lifetime annuities – By purchasing an eligible lifetime annuity, only 60% of the purchase price is assessed. This drops to 30% once the latter of age 84 (based on current life expectancy factors) or five years occurs.
These strategies can be helpful, but it’s important to weigh the benefits carefully. Always consider whether the financial advantage of receiving more Age Pension outweighs the potential loss of income or other benefits from your assets.
The Guided Investor approach
Here at Guided Investor, we focus on achieving financial independence. For those with the means to accumulate sufficient wealth to cover their desired living expenses without the need for government assistance, we encourage them to do so.
However, not all people will achieve this level of assets. For those clients approaching retirement who need the Age Pension, we factor this into their plan and consider appropriate strategies to maximise their entitlement.
We also emphasise the importance of building an income stream separate to the Age Pension. The Age Pension only covers the basics so by having an additional source of income, you can enjoy more of life’s luxuries.
