The age pension is a major source of income for the majority of Australian retirees. A bonus is that eligibility for a part pension gives them access to most of the pension’s fringe benefits, including the prized Pensioner Concession Card, even if their age pension is only minuscule.

But the system is complex, and many people find it hard to work their way through the labyrinth of regulations. As a result, they may fail to qualify for a pension, lose their pension, or receive less than they would if they took advice.

Eligibility is tested under both an income and an assets test, and the one that produces the least pension is the one used. There is an age pension calculator and a deeming calculator on my website.

1. Additional income

Most wealthier pensioners are asset tested, yet I keep receiving emails from them 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.

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, I suggest 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.

Noel Whittaker is the author of ‘Retirement Made Simple’ and numerous other books on personal finance. Email: [email protected]. This article is general information and does not consider the circumstances of any individual.