Income support payments are generally based on an income and assets (means) assessment. Given the system is designed to ensure that higher entitlements are provided to people with lower means, strategic advice can play a significant role to ensure individuals receive an improved entitlement now and continue to maximise their benefits through their transition to Age Pension.
Super contributions and income stream considerations
Generally super in the accumulation phase for someone under Age Pension age is an exempt asset and is only assessed as a financial asset and subject to deeming once they turn Age Pension age.
One commonly used strategy is when the older member of a couple, who meets a condition of release, withdraws their super, and the younger member of the couple recontributes those monies back to their super accumulation account (subject to their cap availability). This strategy could be utilised by a couple where one member is already Age Pension age who therefore could see an immediate increase in Age Pension, or by a couple who is planning ahead for when the older spouse reaches Age Pension age.
From 1 July 2020, work test restrictions will no longer apply to people aged 65 and 66. A bill has also been introduced to Parliament that would enable those aged 65 and 66 on 1 July to use the bring forward provisions. This would make these provisions consistent with the work test changes (subject to the passing of legislation).
Currently, people aged 65 or over on 1 July cannot trigger the bring forward provisions in that financial year.
These changes will allow more flexibility for people utilizing this recontribution strategy to maximize their Age Pension entitlement. This is because, the younger spouse can continue making non-concessional contributions until age 67 without meeting the work test.
People aged 65 or over may also consider making a downsizer contribution, if they have sold an eligible home. Although people currently on JSP, Carer Payment and DSP may benefit until they reach Age Pension age by contributing to their accumulation account, these monies will be assessed once they reach Age Pension age. If your client has a super accumulation account which will impact their entitlement, alternative asset reducing strategies may be considered as they approach Age Pension age. For example, investing into a lifetime annuity (see below).
Many people who were on an income support payment prior to Age Pension age and have decided not to start an income stream, may consider starting one at Age Pension age.
An account-based pension (ABP) is assessed as an asset and subject to deeming (unless grandfathered) irrespective of the age of the person.
The allowable limit for gifting is $10,000 in each financial year or $30,000 over a five- year rolling period. Amount gifted above these thresholds are treated as a deprived asset subject to deeming from the date of the gift. Asset-tested DSP and Carer Payment persons can see an increase in their entitlement of $30 per fortnight if they make an allowable $10,000 gift.
People providing more than the allowable amounts should be aware about the difference between a gift and a loan.* Although a loan is also treated as a financial asset subject to deeming, there is one difference between the treatment of a loan and a gift. The loan is assessed until it is repaid whereas the deprived asset part of the gift is no longer assessed as an asset after five years from the date of the gift. Therefore, it is essential to inform Centrelink of the type of arrangement to ensure the intended assessment applies.
Immediate family members of the beneficiary of a Special Disability Trust (SDT) can avail a Centrelink exemption for gifts to the SDT for up to $500,000 provided they are:
• of Age or Service Pension age or over and receiving a pension; or
• within five years of Age or Service Pension age and are not on a pension**.
Bring forward expenses
People can bring-forward certain expenses which they have planned for in future like home renovations, travel, prepaying funeral expenses or purchasing funeral bonds.
As the principal home is an exempt asset, a value addition or renovation to their home will also be exempt.
Prepaid funeral expenses or buying a burial plot, irrespective of their value, is exempt from Age Pension assessment. Funeral bond or funeral fund purchases are exempt up to a value of $13,500*** and applies to a person who is single or to each member of a couple as long as both the members have a separate investment. Bringing forward expenses can help to increase the Centrelink entitlement of DSP or Carer Payment individuals today.
Investing in a lifetime annuity
Allocating some portion of a person's portfolio to a lifetime income stream (that meets the Capital Access Schedule) may not only enable a better Centrelink entitlement but also help guarantee a regular income for the individual's lifetime regardless of how investment markets perform or how long they live.
With regards to the assets test assessment of these income streams, 60% of the purchase amount will be assessed as an asset until the day they turn age 84, or for a minimum of five years. After this, the assessment reduces to 30% of the purchase amount for the rest of the person’s life. Carer Payment and DSP asset-tested pensioners may consider this strategy today to receive an immediate increase to their entitlement. Or, people who are cut-out from JSP due to assets test when it recommences from 24 September could also consider using this strategy.
Those on Carer Payment/DSP and have super accumulation assets, may have their entitlement impacted when they turn Age Pension age. Investing in a lifetime income stream can also help these clients manage their entitlement and maintain the PCC as they transition to Age Pension.
Valuation of non-financial assets
Individuals should be made aware that their personal effects and household contents are assessed at their net market value which may be different to an insured value. Those currently transitioning from Carer Payment/DSP to Age Pension may want to revise their valuation if they believe certain assets have depreciated in value.
* To be a loan there must be an actual lending of money or an asset of a particular value, and a clear intentin to repay.
** Gifting exemption may apply when they start receiving the pension.
*** From 1 July 2020, indexed annually in line with CPI.
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Disclaimer and Warning
The information above is of a general nature only. It should not be used as a source to make financial decisions. It's also important to note that the legislation and figures related to this topic tend to change regularly and therefore the information above may not reflect the current status. We recommend that if you are looking for advice on this matter, you should contact us.